Private Equity in your Home Maintenance Vendors
We regularly see posts here about how HVAC companies that are so pushy now, with add-ons and upsells. They don't do "fix" stuff anymore - they just want to replace it. What happened? I feel my parents generation did not deal with this crap.
Private Equity is changing how getting shit fixed in your home works. HVAC companies, and many areas of home maintenance including plumbing, roofs, etc, are deeply infiltrated by private equity.
Why is private equity different today?
- The owners of reputable local brands get older, and they don't need to close up shop anymore in the modern world of Capital Markets. Someone will buy a reputable brand from the founder, even if its just some small local business. The owner does not need to stop being involved or give up full control - so it's easy to sell to private equity, but cash out + keep steady income.
- Young, new professionals find it hard to compete with the established brands in a world of "Google Reviews" and Corporate Equity. You cannot build a company without extensive Google Reviews, and partnerships - unless you start by taking a huge cut on your margin.
- "Start small, and build a client base that lets you hire help" doesn't work. Code requirements are more detailed and nuanced, equipment has more nuanced installation requirements, your leads are online, everyone wants to pay with credit, and the bill sent in an email. Building a business is a risk - ideally the risk is worth taking...but when the barriers are higher, and the risk of failure is higher, then Private Equity eats your lunch with their Formulas for Success.
I also want to add - Private Equity companies do not immediately GUT the old business. They'll keep the branding, they'll keep the employees, they'll buy the business nearly transparently. But, they will roll out their Suite of Support tools and slowly the business morphs. Eventually, it is gone. Customers will re-use their favourite local company, and not realize they went private equity YEARS ago.
Private Equity comes with their Suite of Tools - and it probably looks like this:
- New Finance System Insights - what is the margin for particular staff? how often a visit is adjusted with a discount / given for free? what is the margin per hour on different items? how often do you have to "return visit" a customer due to underselling the fix?
See what happens here - upsell, and never anything less than a full fix. Sell a new furnace, avoid selling a new control board. Maintenance will avoid "creative" low cost fixes, because what if the customer is happy with it but still has to call you back - that's low margin behaviour. Don't do it, sell a furnace or leave and go make more money on another job.
- Staff Performance and Labour Market Changes: The business will have access to new insights - the private equity group has labour market studies, they have an understanding of competitors (because they own the competitors too). They can realign the current company labour to align properly with the market mix. Paying for quality employees is low margin behaviour, when the formula for success says you just need the right margin that is known to be accessible. High quality employees are less replaceable, less accessible, and harder to adapt.
- Roll out high margin product opportunities. The business didn't have marketing materials for humidifiers, they didn't have a defined pitch for air purification, they never bothered to sell water filters and softeners - well now they do! You are in the customers house, talking to the customer already for a maintenance visit - might as well "note" the lack of these systems, and thanks to available materials, prepare a quote effortlessly.
There is more - organization structure (they have finance, marketing, accounting, payroll, and more), pressures built into the partnership incentive structure, new policies to roll out, new legal requirements, new reporting requirements, and more!
This is pervasive - this is a thread about residential homeowner contractors, in particular HVAC, going private, but it's everywhere. Dental offices are private equity. Tax firms are private equity. Your vet? Good chance its private equity. Car dealerships? It's like, a half dozen companies now. If it ain't private equity, it's public corporate. It ain't "Private, Local" anymore that's for sure. That's why they're so pushy - it's because your "local companies" that have been "around forever" are not local anymore at all. It's the same logo, sure, but they're not the same company.