Secure a Bigger Payout by Selling to an Operating Company

Brandon Blewett Yeah, absolutely. So Brandon Blue, Chief Development Officer, which is just a fancy way of saying I'm the deal jockey for, for Pave America. And I'll start with what we do on the, on the pre-deal side and kind of what we're looking at. But in 2023, Tom York brought together 2 private equity-backed paving roll-ups. They merged together and formed what is now called Pave America. At the time, it's roughly $500 million revenue and a lot of concentration on the Atlantic seaboard. And what our job has been to expand west. So we moved into the Midwest, we moved closer to the Mississippi and Nashville and Texas, and now we're actually in, in Colorado and in Utah. So we should eclipse around $1.3 billion in revenue this year. So a lot of growth and a lot of that has been due to inorganic, inorganic activity.

Speaker D And David, what about you? What's your role in the company?

David Noble Yeah, I lead value creation at Pave America. Ambiguously titled role, but effectively what that means is there's a lot of longer-term initiatives we want to do across the platform over the next 3 to 5 years. Things like building an outbound sales team, standing up a sport court division. A lot of those things are longer-term in nature. And generally when an operator has to decide between meeting their budget that month or doing something that may pay off off in 12 to 18 months. They make the correct decision to make their budget that month. My job is entirely focused on those longer-term initiatives.

Speaker D And Brandon, you've been on the show a couple times, or 2 or 3 times at this point. What is the topic today? What do you want to discuss today?

Brandon Blewett Absolutely. What we wanted to talk about today was the difference between a holding company, a holdco, versus an operating company. You know, what are the differences in the operating models? What's going to be expected of a seller if they sell to an opco versus a holdco? And then You know, David will be able to talk through what that looks like post-close, but it also, it also shifts what we look for pre-deal. So it influences the way we source, you know, some of the things that may be anecdotal during due diligence when you're a holdco, they become a key driver in the scorecard and the hypothesis behind a transaction.

Speaker D Let's do it. What's the difference?

David Noble Yeah. So, so I look at it a couple of different dimensions. So generally a holding company, they're, they're growing entirely inorganically, right? They're trying to buy new companies and then they want them to operate the exact same, same way, and they'll patch together a bunch and they'll sell it at the end.

Speaker D And there is integration or no?

David Noble A lot of holding companies do minimal integration, right? So they'll let them— maybe they'll put them on the same accounting system so they can consolidate financials, but they won't touch any of the ways in which they, they operate. And ultimately each branch just runs on its, on its own. A lot of times every function is built at the branch, so every branch will have their own IT function, their own HR function, their own accounting function. And yeah, at the end of the day, those, you know, when you go to market as a, as a platform, if you're a holding company, you're just the amalgamation of each individual branch. Ultimately, what we're trying to build is an operating company. So on top of the inorganic growth, we're looking for organic growth as well from the branches. We want to create one shared standard of people, processes, and systems of how, how we grow as a platform. And we want to build some of the core capabilities centrally. So we want to consolidate accounting, IT, take that off the operator's plate where possible so that they can focus on their, their core business. And generally what we find is it's a— it eases the operational burden for the operators. There's less key man risk where it feels like they are the ones who have to do every job in the business. And at the end of the day, I, I think as a platform and an operating company, we, we sell for a higher multiple, which is good for all the, you know, the companies that join our platform.

Speaker D Is there a difference in terms of the legal entities? Because that's what a lot of people think of, holdco versus operating company, or are they primarily operational in nature?

Brandon Blewett I would say, and David, keep me honest, that it's largely operational. That's where the difference is. And the legal entity structure, it's very much case by case, right? If we have an existing entity within a state or we have an entity where they already have licenses in a state where we're pursuing a transaction, then we'll probably just use a legal entity that we currently have. I would say the legal entity structure piece is not that it's an afterthought, but it is

Speaker D Not the core driver.

Brandon Blewett Correct. Correct.

Speaker D Right. Why would a company be a holding company as opposed to an operating company? It sounds like a lot less work. Is that the primary reason or are there other driving factors here?

David Noble Yeah, yeah, it's a lot less work. And, you know, I think ultimately sellers have to choose, you know, what path they want to go down. They can sell to a holding company and keep, you know, operating exactly the same way, or they can keep going independently. And as a, you know, as an operating company, it's a bit more work, but at the end of the day, you get higher valuations for it. And there's also just, as a seller, there's benefits to being part of an operating company. When we talk to sellers, one of the things that matters to them is legacy, right? Like, what is, how is this business going to continue on? After I, after I leave. And if they are the owner-operator who's driving the business every day and they're— they step away, often those businesses decline. And that is meaningful for the company itself. It's also meaningful for the employees who they provide livelihoods for. Part of this, this transition to being an operating company is as we develop, you know, standards at Pave America and there's a Pave America way of doing things. It ensures that they eventually can, can step back from the platform if they want to, and they're ensured that their business is going to carry on. You know, that's ultimately what we want for them. Like, we want these businesses to continue to, to grow and not be entirely dependent on one or two people in the organization. But, but that requires training other people up in their organizations in order to be able to take over and share standards across Paid America. Like, our goal is that Pave America is a place where we operate at, create the Pave America way and operate at a standard where one president can take over another branch and be able to run it when someone retires. That would be a success.

Brandon Blewett And Jacob, one other thing I think, I don't want to, and not that either of us are like dogging on holdcos, I think it also depends on what stage you're at, right? Like if a PE firm goes out and acquires a platform, you may not know necessarily what best-in-class practices are. So you're going to be just aggregating companies, right? Buying companies. And then once you get to a certain maturity stage, I think that— and that's where we're at that inflection point— it makes sense to shift over to the operating company model.

Speaker D What's going to happen if you ask a PE company, a PE firm, are you a holdco or an operating company? I have a feeling like you're not always going to get a straight answer to that question.

Brandon Blewett I think that there are some that are. And David, you've been in and around this space as much as I have. I mean, I think there are some that they're very transparent that, hey, this is a holdco play. They're going to, like David alluded to earlier, they're going to integrate the back office, they're going to integrate payroll, maybe health and welfare benefits. I think that their marketing materials to companies is that they'll say nothing is going to change. And obviously there are things that will change. But I think if you hear a buyer say, hey, nothing's going to change, they're probably more in a holdco mentality where when we go to market, we do talk about, hey, there are certain processes, certain things that will change because we want to grow the entire platform, you know, together, everybody rowing in the same direction. I think that is more indicative that somebody is an operating company.

Speaker D Why the change?

Brandon Blewett I'll let David speak to this, but I think for us, at least from the deal side, is obviously I'm focused a lot on multiples and valuations. And the data proves out that operating companies trade at higher multiples. And if we all have a significant stake in this business, all the people that sell to us, they're rolling forward meaningful equity, like we want to maximize that return. So I think from my chair, it's about maximizing the valuation for everybody that's involved in Pave America.

Speaker D What is that, a 2, 3x, 4x, about that?

David Noble Yeah. Generally what we see is the, the like market leaders who are operating as more of an operating platform, they're getting anywhere from like 2, 3, 4 times turns as a premium.

Speaker D How common are holding companies in your industry?

Brandon Blewett In our industry, I would say it's going to become more common because after our transaction last August, I think, you know, it was kind of the blueprint that, hey, this, this space is attractive to private equity. So there's going to be a lot of folks that are, you know, getting into the game, wanting to create that platform. And, you know, I think for the first— until you get a critical mass of companies and decide, hey, which operations work, work best, you're probably going to be in that, that holdco mode.

David Noble I think one of the things that's exciting, you know, this morning I had a meeting with a bunch of our presidents and what excited them about this journey is all these branches are doing something exceptionally and hearing them talk about what they do exceptionally, like everyone else was excited to adopt it. So there were operational ways in which people were manning crews where they were doing a mill and pave with 7 folks on the crew. Other branches were doing it with 10 people on the crew. The folks that were doing it with 10 people were saying, oh my God, how can I do it with 7, can I come and be trained in your way of doing it? That way I can split out those folks and have another crew and be more, more operationally efficient. And, you know, that, that's success. And then others are fantastic at sales. They have found a way to do outbound sales in a way that's pretty unique for this industry, and they're looking to adopt those best practices. So all we're trying to do is go to each branch and say, what makes you unique? and special, what are you best in class in, and drive those, those practices across the platform.

Speaker D To what extent are there shades of gray here where you're kind of a little bit of each, part operating company, part holding company, or transitioning from one to the other?

David Noble It's definitely a transition, right? And it's— the idea is not to get to a point where everyone is, you know, pressing the buttons the exact same way and, you know, operating uniformly. You know, we're always going to want to leave operators to operate and have the flexibility within their market. We just want to have for a critical few things around sales, bidding, operations, understand what is the best in class and be able to give that to the operators. But it is a spectrum, right? Like you can have absolutely nothing integrated and just be a, you know, in name only a company together. or you can all operate the exact same way in every single dimension. You know, it's a bit of an art and science of finding what standards we want to set while giving the flexibility to the operators to do what makes sense in their market.

Speaker D What functions are you taking over now? HR, accounting, legal? Can you give us a kind of a short list here and tell us the, the reason behind that?

Brandon Blewett I mean, I would say Those 2 are probably the first out the gates just because it is— we do need to be pressing the buttons in the same way for certain functions. So, you know, getting everybody on NetSuite and in many, many cases getting people on accrual accounting because they're, you know, coming from a cash accounting way of doing things. And then from an HR perspective, you know, we're north of the 50 employees, obviously. So we migrate people as quickly as possible to our health and welfare plans just to make sure that we're ACA compliant. And from a, you know, recording time perspective, there's just a lot of labor laws in some of these jurisdictions that when you're, you know, an employer of maybe 40 to 50 people, you're not going to be under the radar. But at 3,000 employees across the platform, the microscope is going to be a little bit more, more focused on, focused on you. So I think those are two of the areas that during diligence I focus on. But I think I'll let David cover, you know, the operation safety and sales piece, because I think that's a huge component for the organic growth as opposed to where I'm focused on compliance and inorganic growth.

Speaker D David, what about those 3 functions?

David Noble We have some systems that we use across the platform, but even on like the sales team, we acquire companies that have— the owner-operator has done entirely the entire book of business, right? Everything runs through, through them and they've built fantastic businesses through their relationships. A lot of what we can offer is helping onboard, you know, a sales team that operates the same way as some of our larger branches who have been doing it that way for 40 years. And they've seen tremendous success with that and they've seen their business grow. Like ultimately, we— what I love about this, this model is the incentives are completely aligned. Like we want these companies after acquisition to keep growing and to grow at the fastest pace possible. And, you know, we feel by taking off some of the back office burden from them and then also helping them with, you know, sales if they don't have it, you know, we can help.

Speaker D Welcome back to M&A Talk with Brandon Blewett and David Noble. Gentlemen, why should this matter to a seller? Why should a seller care?

Brandon Blewett I think from my perspective, so sourcing to, to deal close, I, I think the biggest piece is If you're going to go work for a holdco, you don't want anything to change. That is probably, hey, this is going to be really attractive. I can keep doing things as I want. If you are going to sell to an operating company, I think it's just very important to understand what are those changes going to be. And then when you evaluate those changes, I always like to ask a seller, hey, you know, you're currently at, say, $30 million top line right now. You said that you want to grow to $75 million. Are the changes that we're going to enact at your business things Are those things that you are naturally going to have to do if you are going to achieve that on your own? And if the answer is yes, that generally gives people a little bit more ease about some of those transitions.

Speaker D You know, it's interesting. I just had a conversation with a business owner, very successful business owner, making millions per year net in his pocket. And his biggest challenge was just all that busywork, having to wear 8 hats. To what extent would this situation be beneficial for someone like that? Would that individual's be solved by selling to an operating company?

David Noble I mean, that's the dream scenario, right? Like the, these owners, like we want them focused on growing their business. We won't want them focused on closing the books every month. We don't want them focused on, you know, the intricacies of HR policy. Like we want to take that off their plate so they can only focus. on running their crews efficiently, going out and finding new business, helping us acquire more companies. Like, that's the type of stuff that we want them to be focused on. And candidly, for most of the owners we work with, that's what excites them. Like, they're not excited about— they didn't get into the industry to worry about accounting most of the time.

Speaker D What functions were you handling before when you were a holding company?

Brandon Blewett We've always had corporate HR, corporate accounting, but I think, you know, we were still building out at the TopCo level. So now we have a very robust finance and accounting group, so we're able to help support the local businesses a lot more. The HR team has also grown, so they're able to help, you know, support.

Speaker D So even though you were handling those functions, now they're much more robust than they were before. So that's an interesting question because you could say to a PE firm, are you going to handle HR? Are you going to handle accounting? And a yes/no answer is not going to give you the answer that you need, will it?

Brandon Blewett That's fair. I think what I would ask in that situation is what responsibilities will corporate HR have post-close? And if it sounds like it's more of just a, you know, monitoring situation, then I would err on the side that's, that's a holdco and you're probably going to be on your own a good bit. You know, whether it's finance and accounting or HR or safety, we have not that people want to read manuals, but we have supporting documents that show, hey, here's how you should think about doing things. We're available for a call. We can come up and be on the ground with you to help make those decisions. I think that is where the, the shift to an operating company happens.

David Noble I'd also ask, how are you going to help me grow? You know, like, what support are you going to give me? And if they say, you know, like, hey, it's, you know, we'll give you some money, that's one thing. If they say what we're trying to do, which is like, we are going to hand off warm qualified leads to you. We are going to have national accounts that have work in your area, and we are going to support you in getting those. We can help you recruit new crews because you are capacity constrained. Like, all of those things I think are massively beneficial to, to owners.

Speaker D Just out of curiosity, are most roll-ups, are those structured as operating or Holding companies.

David Noble I would say that there's been a, a shift in private equity recently where it used to be enough to just buy a bunch of companies and sell it to the next person. And I think the days of just pure multiple arbitrage are, are coming to an end. And so they're looking to how can we make this platform so every company we, we buy, we, we make it more valuable because we can grow the underlying business with it. So I— and that requires systems, processes, and like actually being able to add sales team, add crews, implement these, these growth levers that I think they weren't thinking about before.

Speaker D If you had to allocate the benefits here, if you had a 100% pie, 30% to lower cost and, you know, X% to benefit number 2, how would you divide that up? What are the main benefits and how would you prioritize those?

Brandon Blewett From my perspective, the greatest benefit is the multiples increasing. And I think the other piece that makes our jobs fun is that we are very much focused on revenue growth. You know, we have a national accounts team. There's a lot of our businesses that have far-reaching networks. They're turning down work or subbing work out. And now that we have a national platform, they're able to reaping the benefits of that. And the nice thing is, look, this is not, you know, at the stage we're at, this is not a cost-cutting exercise. So we're not having to show up and say, hey, you know, we're going to fire all your people, right? We don't terminate anyone. I think the only person we let go was an owner. His brother-in-law was on the payroll and he wasn't doing anything and he didn't want to get a divorce. And so we, you know, took the fall for, you know, getting rid of a brother-in-law, right? I mean, it's The cost savings that we see are buying capacity for equipment, for supplies, and then, you know, also with like things like commercial insurance and health and welfare benefits. Because of the size of our platform, we're able to go out and get, get better rates.

Speaker D David, what about you? How would you rank the benefits

David Noble Here? Yeah, I would agree with Brandon that ultimately, like, the higher multiple at the exit is good for the owners and, you know, a great benefit of this. But also we need to help these companies grow. Like the way a lot of these deals are structured, they have earnouts if they continue to grow. I view my team's job as making sure that those folks hit their earnouts. So we want to leverage the platform. If someone says, you know, I could own— we had this recently. I could only grow if I could hire another crew. Great. Like, let us help you do that. I could only grow if we could get this, you know, machinery that we haven't been able to do previously because it's a big CapEx spend. That's the type of stuff where we can help. So yeah, we think that there's a lot on the growth and revenue side.

Speaker D How many acquisitions have you done since founding?

Brandon Blewett We have 42 businesses right now. When I joined in 20— since I joined in 2023, we've done about 20 deals. So, I mean, we doubled the size from 500 million to a billion since 2023. And it was about 20 deals that helped catapult that.

Speaker D How has your acquisition criteria changed?

Brandon Blewett It's changed a lot from, you know, people and culture have always been something that Tom, you know, our CEO is focused on because at the end of the day, his view is, I want you to like me, I want to like you. And if we don't, then it doesn't really matter what the financials are as far as putting a good deal together. I think that as an anecdote is no longer the case, right? We have a deal scorecard where we're evaluating these businesses. And So instead of just understanding the systems they use, how they handle change, what their growth goals are for the business, those are now actual questions that go into our diligence reports and are factored into the discussions with our investment committees to ultimately get approval for those deals. And I'd say what also has changed since David and his team have joined, and it's been great, they get to come onto the process midway through diligence and They're asking the questions to help us build out, you know, their plans. And it also helps that there's now a handoff, right? It's not just, hey, me and my team are, you know, in their business for 8 to 10 weeks asking all these diligence questions. We close and then, you know, poof, we're gone. You've got to figure out who's doing what and who's responsible for what. So I think that understanding the businesses that are susceptible to, you know, making these or they're agreeable to making these types of changes, that's a heavy factor in whether or not we go forward.

Speaker D How has integration changed for you? Obviously, that must be much more involved now than it was before because there was— there really any integration before? Is it just a little HR and accounting and a few other things?

Brandon Blewett You know, I would say that, you know, look, I love— my team is great and I'd like to think we do a really good job, you know, getting to the closing table. You know, we were monitoring to make sure that, you know, people were using NetSuite or that they had moved over to Paycor. We weren't equipped to find out if they were doing all those things correctly. Right. Like we wouldn't find out until there was a hiccup with finance and accounting. You know, I'll let David speak to it, but the integration plans are much more robust. There's a lot more communication, you know, upwards, downwards. And I think that will help us make sure that not only are they on the system, but they understand the system and know how to use it correctly so that we're getting the visibility into the data that we need.

David Noble Yeah, and my team will meet with the owners as, as much as is necessary. Like, we want to meet every week for the first few months and just be a single point of contact to navigate the organization. Like Brendan said, we're now a larger organization with a lot of resources to help them. We want them fully at their disposal. So if they have a problem with our, you know, our CRM or NetSuite, like, we're here to, to help them through it. If they have an idea of some way that they want to expand, like we are going to marshal everyone in their organization to help them. Like that is, I think it's just a bit easier now that we have a single point of contact who is helping them through integration.

Speaker D So with your new acquisition criteria, how much does that tighten the funnel, so to speak?

Brandon Blewett I would say that before we had this shift, for every 5 to 10 deals, you know, we would probably have conversations with 2 or 3 of them. I would say that we're able to ask a lot of questions about the goals of the owner, to where for every, you know, 10 that we receive, probably talking to 1, maybe 2 of those. So that's helped because we are still very focused on inorganic growth. But with all the activity in the market, like me and my team need to be able to hyperfocus on the businesses that we can actually get to the closing table and, and we can, you know, amplify their growth story post-close.

Speaker D How much organic growth is realistic in this industry right now?

David Noble I mean, Brandon, you could talk about some of our recent acquisitions, but there are businesses that we are acquiring that are growing organically 15%, 20% per year. They're stealing share. They're going after and finding new customers. There are new end markets that are popping up. A ridiculous example, pickleball is very big right now, right? That needs a lot of paving. And so there are these owner-operators who are going after these, these new markets. And they're finding a lot of growth there.

Brandon Blewett And I think it's also market dependent, right? Like there's some markets where, hey, everybody's moving to a certain geography, so there's just going to be a boom. But, you know, one particular example, we acquired this business in Dallas and fantastic business, like, and he had told us that he had essentially capped out because he just didn't want to put personal collateral on the line to, you know, increase his crews and his CapEx. And I think they were doing— when we closed, it was about $8.5 million in EBITDA. And this was last October. So it's, it's July, mid-July, not even a year later. And I think they hit almost $14 million in EBITDA. So, you know, we were able to add crews. We knew we had the demand. And now, you know, he's sitting pretty and pretty excited about where things are going. And now because he's with the platform that, you know, some of his clients, which are in the utility space, are asking like, hey, why don't you greenfield a location in X market or in Y market? And if we're able to get talent that can backfill in, in the, at the local branch in Dallas, well, let's take some of that experienced talent to another market and just continue to grow, you know, alongside that big customer.

Speaker D That's incredible growth in just one year. Gentlemen, as we wrap up the show here, I'll ask each of you, David, what do you think the takeaway point is here for you?

David Noble I think it's that there's a lot of great benefits to being part of an operating company. I think it cements the legacy of, of sellers and makes sure that when they step away from the business, if they want to step away, that their business is going to continue to grow. And I also think for them it means that there is a platform of support. They're not going to keep going at it alone. And there's a lot of benefit to that.

Speaker D And Brandon, what about yourself? What do you think the takeaway point is for the listeners here?

Brandon Blewett I think that if you're, if you're looking at selling your business, it's you need to have an honest reflection of what it is that you really want out of the transaction. If it is legacy, related, I think selling to an operating company is a very solid choice thanks to all the things that David outlined. There are many sellers that they're ready to cash out, and I don't think that's a poor decision if legacy isn't important and having to help usher in some of these changes is something that isn't maybe what you're looking to do. I think those are the— just look at those factors and I would say be honest with yourself and also with the You know the buyer pool, so you understand what the pain points are going to be once you've gotten to the closing table.

Speaker D And I think the main takeaway point is here: if you own a paving company, these are your guys and you want to sell. We'll have that contact information in the show notes. Pave America, Brandon Blewett and David Noble. Thanks again for joining us in the show.