Do you wonder what happens to the contractors who sell to private equity? A lot of them are too young to retire. Their non-competes will soon expire. When they do, get ready for the rebound.
Contractors who sell to private equity usually, though not always, stay on with the new entity. Few make it past two years. If they’re in their mid-60s, this might have been their last rodeo. If so, they’ll probably play with real estate, buy some land, do a little consulting or volunteer work, and look for a hobby.
A lot of the contractors who sold are in their 40s and 50s. That’s young enough to build another company. We’ve seen it before. Ken Goodrich, for example, has built and sold three companies. Ben Stark did the same. One could make the case that Ken and Ben are atypical contractors. After all, both are in the Contracting Business Hall of Fame. Still, the precedent is there.
Constrained by non-compete agreements, the young to middle-aged contractors are biding their time. Some are opening non-competitive businesses like garage doors or general contracting. When the time is right and the non-competes have expired, many will rebound, doing what they know best. They will start new HVAC companies and they will be forces in their markets.
They will be forces because they don’t have a learning curve. What Ken and Ben both demonstrated is each rebound is faster and bigger. It’s just easier the second time around.
Not only will the rebound contractors know what to do, they will have the money to execute. They are experienced and well-financed. And this time, they will start with the end in mind. Having been through one exit, they know what is required and what is attractive to private equity. They will build their 2.0 businesses accordingly.
Rebound contractors have another very powerful motive force in their favor. This is connections. For example, they already have banking relationships where the bankers know and respect them. The bankers watched them build and sell their businesses before. They will be confident they can do it again.
Vendor relations are another factor. The rebound contractor doesn’t need to prove himself to a distributor/manufacturer. More than likely, he’ll get very favorable pricing and terms on his preferred lines of equipment from the get-go.
The rebound contractors will likely be restricted by non-solicitation agreements. They won’t matter. By the time the rebound contractors start their 2.0 companies, private equity will have ruined their old companies’ cultures and the techs will jump. The rebound contractor won’t have to say a word. The grapevine will do it for them.
The most powerful connections will be the community. They have a personal brand that’s every bit as strong as their company brand. It’s unlikely that any general manager hired to replace them will have the same relationships or desire to build them. They have a decade or more in a leads group, a church, a Rotary or Kiwanis Club. They have dozens of chamber of commerce mixers under their built. They have a network.
Then, there is the entrepreneurial factor. No one who signs the back of a paycheck will work as hard as the guy who signs the front of the paycheck. No hired manager will put in the hours, and will have the drive and the fire in the belly that the entrepreneur brings.
This is also an exciting time to make a clean start in HVAC. There are huge expectations about the impact of artificial intelligence. Even if AI falls well short of the hype, it will still change the way contracting businesses operate. By incorporating AI out of the gate, the rebound contractor will have more success and fewer struggles in the implementation. For him, AI will help him be disruptive to his competitors without AI being disruptive to his business.
Industry structure also favors the rebound contractors. It seems like we have exited the shipment cliff and are starting a 10-year run where every year will be better than the one before it.
A final factor favoring the rebound is their time working for the private equity group. It’s given them new insights into business. It’s helped them see and imagine ways to scale.
Will the rebound happen? A lot of contractors who sold to private equity are not hiding the fact that they want to start again. They’ve got too much energy, too much drive, too much knowledge, and are too young not to. It’s going to be fun to watch.