Background
Tell us about yourself (professional background, experience before acquisition). I started my career as an auditor with Ernst and Young and as weird as it sounds, I really liked it! But I didn’t like it enough to make a career out of it. I learned that if you want to figure out how a business works you have to follow the money and being an auditor allowed me to do this. It was great fundamental learning, but after 5 years I moved on to a finance role at a Fortune 500 company. I spent the next 10 years in different Finance and Operations roles until I caught the ETA itch and ultimately quit my job to pursue my search full time.
What motivated you to pursue ETA / SMB acquisitions? It was a lifestyle decision. My wife works full time, I was working full time, we had two small kids and it just wasn’t the lifestyle that we wanted. Additionally, with both of us having standard W-2 jobs and renting an apartment in Brooklyn, we didn’t own anything! We were terrified of working in the corporate world for 30+ years and only having a 401k to show for it. We wanted a more flexible lifestyle that provided us with an opportunity to own an asset where our efforts directly impacted the value.
Search Process
How did you decide on the industry/business type? I had a geographic focus of roughly two hours from my house so I was pretty industry agnostic. There were certain industries that were non-starters (like food) but for the most part I looked at everything. Initially I wrote off all franchises, but as my search progressed I had to change my criteria and considering franchises was one way that my thinking evolved. There are only so many non-franchises with $500k+ SDEs within two hours from my house so I had to broaden the funnel. I ended up acquiring a Mosquito Joe franchise resale simply because it checked all the boxes and there was no reason not to do the deal.
What methods did you use to find businesses (brokers, direct outreach, networking)? I only looked at Brokered opportunities. However the benefit of a geographic search is that you can get to know your local brokers well, so I found a few that were good and kept in touch with them. Sometimes they were able to let me know of coming soon opportunities.
How long was your search from start to finish? After kicking the tires while working my corporate job for about a year, I quit my job in Aug 2021 and closed on my deal Dec 2022. All in all, about 17 months to close my first deal.
Was it full time or part time? Full-time, without a doubt.
How many deals did you put under LOI before finding this one? I made offers and issued LOIs on 6 deals, but only had 1 under LOI prior to the deal I closed on. That deal died after about two weeks of diligence and it probably was the best learning experience of my search.
Can you share some key challenges or unexpected surprises which arose during the search process? The sheer emotional weight of searching for a business was surprising. It’s a total roller coaster… the highs are high and the lows are low. There’s also periods of extreme slowness and then you get a packet of information and it’s off to the races to go through it. I read countless stories about people that did multiple acquisitions in a 1-2 year period, but my big take from the search process is that it's extremely difficult to get ANY deal done. So many things have to come together for a successful close; it's really mind blowing. It’s a more challenging journey than I initially expected.
Due Diligence
Did you focus on the usual: finance (Q of E), legal, commercial (customers, contract terms) and operational matters (team, customers)? Yes, but there were two other things that I thought about a lot. First, did I trust the owner and would I want to spend a lot of time with them? If the owner is not trustworthy or I got a bad vibe from them, it was an immediate pass for me. Secondly, while I was industry agnostic, would I be OK thinking about the industry 24/7 for the next 5+ years? I knew I didn’t need a passion for an industry, but I couldn’t hate the industry either.
Anything else you dug into in diligence which informed the process for you? Specific to franchises, it was really important to speak with other franchisees. This is crucial to validate the franchisor which is the other party you are entering into an agreement with. When evaluating a franchise opportunity, the franchisor is arguably more important than the seller you are buying from, so you have to speak with as many existing franchisees as possible. All of the existing franchisee contact information is listed in the FDD (Franchise Disclosure Document) so its easy to identify them and call them.
Do you want to shout out any service providers in particular? Find a lawyer that is experienced in transaction work, don’t use a generalist attorney. If you can find a referral from someone that you know and trust, even better. I used David Levaton with Franchise Legal Support (he was referred to me) and he was excellent. Highly recommend him if you are buying a franchise.
Any pivotal moments or lessons learned during due diligence? I learned this not from my deal but from other deals. If the cash flow is mostly add backs, it will be incredibly difficult to finance with a SBA loan. Obvious non-cash add backs like depreciation and amortization are fine, along with cash add backs like owner salary and interest. However the grey zone of miscellaneous personal expenses, related party management fee, owner auto, etc the bank will not include in their debt service calcs without significant documentation, which the owner likely can’t/won’t provide. Be careful if you look at a CIM that is mostly add-backs. Additionally, if a company is growing rapidly, traditional SBA financing will be difficult as well. Tax returns are the gold standard for the SBA so you be me using a tax return from 24 months ago to support a purchase price from today and if the business has grown 20-30% since then, it will be very hard to finance a present day purchase price (unless you want to put down a ton of equity). I learned that one the hard way and its why my first signed LOI died.
Acquisition Details
- Name: Mosquito Joe (franchise; I bought in NJ and then acquired one in PA shortly after)
- Industry: Outdoor Pest Control
- Location: Hamilton, NJ
- Team in place: It’s a seasonal business that operates from April - Oct and all of the staff is laid off at the end of season. However, I had two office staff return, along with 4 technicians so I wasn’t starting with a blank slate.
- Services / Products / How you make money: We focus on outdoor pest control services, particularly mosquito control. While the service is non-contractual we treat on a recurring three week basis with most customers receiving multiple sprays a season and returning year after year.
Deal Data Points from time of Close:
- Revenue: $900k
- EBITDA or SDE: >30% SDE margin
- Purchase price: 2.5x - 3.5x
- Employee count: None at close (see above). Need 2 office and 8-10 technicians to operate.
How was the deal structured:
- Asset vs stock - Asset
- Financed (SBA loan, seller financing, etc.)? How much cash did you need to bring to the table? Standard SBA deal with an 80/10/10 structure. I brought less than $100k to the table.
Closing
How was the run up to closing the deal… any major delays or did things largely go as planned? There were a few surprises towards the end (there always is) but nothing that put the deal in jeopardy. It just took a lot longer than I expected. A big reason why was because the franchisor has their process for vetting and approving candidates and it can’t be speeded up. Our LOI was signed at the end of Aug and we didn’t close until the end of Dec.
Tell me about Day 1 (aka close):
How did you announce the acquisition? We closed in my offseason and there were no employees so I never had to give a day one speech. I met a few of returning technicians a couple of months before the season started, but that was mainly for them to feel me out and see how excited they were to work for the new owner. I remember a direct quote from that day… “You sure don’t look like an accountant!”.
How did you manage the transition for customers? With customers I actually tried to downplay the transition. The seller had built a good business with great customer service so my message was “nothing is going to change”. B2C pest control is pretty transactional so as long as you answer your phone and show up when you say you will, people are generally happy.
What challenges (if any) did you have with the nuts and bolts of the transition (i.e. transferring phones, onboarding for payroll, etc.) Since it was an asset sale, for the most part the transition was pretty seamless since everything was a new entity so I just had to start things fresh. However I did want to retain the phone numbers of the cell phones that the technicians were using so I had to get them transferred by T-Mobile. Easily the most time consuming and difficult transition item was transferring the cell phone plans. I probably spent 20 hours on it! I have since assumed the leases on a few trucks from other Mosquito Joe owners and transferring the leases with Ford Motor Credit takes forever. You have to call them every couple of days for a status update and to keep moving the ball forward otherwise it will never get done.
Post-Acquisition Experience
What were the first 90 days like as it ties to taking the reins, maintaining continuity in operations, keeping customers happy, keeping the team engaged, etc.? I really didn’t know anything when I closed. The franchisor provided a lot of structure, which was helpful, but I spent the majority of my time the first 90 days trying to get licensed so I could actually operate my business when the season started. We start treatments on April 1 so I had to take three exams and get licenses in 90 days so thats where I focused my time (in addition to getting truck titles transferred, etc).
Any sound memories of getting kicked in the teeth? Because I spent so much of my focus on getting licensed, I didn’t do much (if any) valuable preseason planning work. In my business routing and having efficient routes is so important and I spent ZERO time with the old owner discussing routing and planning. One of my returning office said “I used to do routing, I’m happy to handle it” so I delegated it completed to her without know what was involved. We got 3-4 weeks into the season and I kept asking myself “why are guys only completing 50% of their stops?” I came to find out that we were trying to service people in April that don’t typically start their service until June so my guys were getting turned down left and right. Then I realized that I needed a better handle on routing so I took it over. There was a 4-6 week period where I spent from eight to midnight 4-5 nights a week going over the schedule and putting people on the right timeline. Soon our completion percentage jumped to 85 or 90% and the techs were happier that they could just do their job as opposed to getting turned down left and right. This was all planning work that should have been done in the offseason, but I didn’t know to focus on it.
Anything that was easier than you thought in those early days? Nope! Everything has a steep learning curve as you can imagine.
Service Providers & Tools Used
Can you share any specifics around who/what you use in your day to day to run the business and what you think about it (do you like it, do you want to try out a new tool, etc.).
Service Providers
Insurance: I used a local broker who finds me the best deal. I recommend getting quotes from two brokers when you first get started.
Software / Tools
- CRM: We use the CRM that the franchisor mandates
- Accounting: Quickbooks online
- Payroll: Gusto… love them!
Performance & Insights
Your acquisition was a little while ago. How has the business performed in years since? Can you share year end revenue metrics and net profit margin if you know for the intervening years?
- Yr 1- $1.1MM - (2%) contraction YoY; SDE margin 30-35%
- Yr 2 $1.14MM - 4% growth YoY; SDE margin 30-35%
Has the structure of the team shifted (i.e. did you bring anyone in or promote up to run day to day)? I slimmed down my office staff. The old owner had 3 in the office in addition to himself, I have 1 full time and 1 VA. I also hired one person to manage the technicians and provide onsite leadership. They aren’t a GM per se, but they definitely relieve me of the obligation of being there everyday. I also completely outsourced my sales function to an US based call center. This has freed up a ton of my time and our close rates have improved.
What strategies have been most impactful as you think about the growth (or lack thereof)? Unfortunately my growth has been stagnant, but its been a very difficult operating environment for all MoJo owners. The nice part about being a part of a franchise is that you can see how “the industry” (e.g. your peers) are doing so you have more transparency to gauge your performance. Whats worked best for me is to choose 2-3 things to focus on each season and execute them well. Change for the sake of change is not worth it, neither is trying to change everything all at once. But if you focus on 2-3 impactful things, it can drive great results. And don’t waste your time on items that can drive marginal improvements; focus on the items that can drive 20x the outcome.
What’s on the horizon for your business? Keep my head down and focus on growing my smaller territory. I’ll also continue networking with other owners so that I’m top of mind if they are thinking about selling.
Lessons Learned
Reflecting on your ETA journey, what are the 2-3 biggest lessons you learned through the process? The ETA journey is hard with high highs and low lows; it's a roller coaster. You’ve got to find a community of people to learn from and support you otherwise you will burn out or get depressed. At the same time, I’m so happy I decided to quit my job and pursue this journey. I wouldn’t trade my experience for anything. 2) You have to be able to make decisions quickly, always with imperfect information. To plagiarize a friend of mine… “Analysis paralysis kills more businesses than bad decisions. Take bold action, then optimize on the fly.” In most cases, 80% is good enough and then you can adjust accordingly.
Parting Thoughts
Anything else you want to share with would be business buyers reading this? You need to be 100% committed to really make this work. If it’s your first time buying a business, you need to be a hands on operator as there is nothing passive about business ownership. You will be thinking about your business 24/7!
Any favorite resources, be it books, podcasts, or other which really helped you along the way (or maybe you found them later and wish you had seen earlier)? There is so much good content out there. I used SearchFunder a lot when I was first getting started, but I don’t use it anymore. X / Twitter used to be awesome, but theres not nearly enough people adding value on there anymore. I (still) love the Acquiring Minds podcast and Brian Beers was very influential in getting me to think about franchising.
Gives / Ask
Gives: anything you want to offer up to the community, be it regarding search, your industry, or other? I’d love to talk to people about franchising and why its probably the best path for a first time buyer.
Asks: anything the community can help you out with, whether you are looking to hire in a GM, find a new marketing agency, or even consider exiting to a bigger buyer out there? In the next 18-24 months I will likely partner up to scale quickly something in the franchise space. I would love to speak to a few people with similar aspirations. Props if you have QSR or food experience!
Contact Info
If you’re open to it, how can people reach out to you (email, LinkedIn, X) and under what circumstances? Email me at jesse@mtsophia.capital. “I’d love to pick your brain” will probably not get a reply, but if you have something specific you’d like to discuss, let me know.
