In this episode of “Sell or Scale,” John Bartlett welcomes Logan Lowery from LP First Capital to discuss the world of private equity, specifically focusing on investments in service providers and contractors in the trades. Logan introduces LP First Capital as an Austin-based private equity firm that, despite being relatively new in the industry, has rapidly expanded its portfolio to over 50 operating companies in just four years. The conversation delves into the firm’s strategy of acquiring businesses in service-based sectors, with a particular emphasis on industries such as HVAC, plumbing, roofing, and landscaping.
Below is the full transcript from the episode.
John Bartlett
Hey, this is John Bartlett from Brentwood Growth. I’ve got Logan Lowery with me from LP First Capital. Logan, how are you doing today?
Logan Lowery
I’m good, John. Thanks for having me on today. Excited to be here.
John Bartlett
Yeah, thank you for taking a few minutes. We’re going to talk a little bit about the private equity world, your firm, and what you guys think about in terms of investing or buying service providers and contractors in the trades. Why don’t we start? Tell us a little bit about your background, your personal journey, and a little bit about the firm.
Logan Lowery
Yeah, happy to. And again, thanks for having me, John. LP First Capital is an Austin, Texas-based private investment firm or private equity firm, as some would call it. We are relatively new in the private equity world. We made our first investment in 2020, so we’re only about four years old from a firm standpoint. But in those four or so years, we have acquired just over 50 operating companies. So, we’ve been quite active on the M&A road, if you will. Most of those have been companies that I would say are in the service-based sectors or the trades. For example, at a back-of-the-envelope count here, I think we’ve acquired 17 heating and air conditioning and plumbing companies, and then the balance would be other companies in roofing, collision repair, landscaping and property management. So, a lot of service-based industries – that’s what we focus on and are looking to continue to do more of going forward.
John Bartlett
That’s great. So, when you guys think about platforms or sectors or groups of companies that you want to invest in, what are some of the common characteristics that make those sectors interesting for you?
Logan Lowery
Yeah, it’s a good question. We try to be, it’s a buzzword in our industry, but we try to be very thematic about what industries we go into. The reason for that is we typically take a deep dive approach into an industry. So, we don’t want to go in and make one acquisition in a certain industry and that’s all we do. Rather, we want to pick an industry, let’s say heating and air conditioning, and rather than make one acquisition in that space, we want to become industry experts, if you will, in that space.
We want to make 10, 15, 20 acquisitions in that space and then start to group those companies together. So, we look at a lot of different industries to answer your question. Some of the things that we’re going to look at, they’re not mind-blowing rocket science type things, right? They’re things like we want to be in recession-resistant industries. So regardless of what’s going on in the stock market or what’s going on in the political landscape, we want industries where the service or product that industry is providing is going to be stable in both good times and bad. Generally speaking, that leads to a more predictable cash flow business. And that’s what we want, right? Private equity is known to – we don’t need explosive growth, but we don’t want underperformers either. We want steady, predictable cash flows. And there are a lot of industries that fit that characteristic, but that’s probably the number one thing that we’re looking for.
The second thing that we’re looking for is fragmentation within the industry. And more specifically within that fragmentation, we want to find a healthy base of operators who are good businesses. They’re profitable. They’ve been running for a while, let’s say five, 10, 15 years, but for one reason or another, they are resource constrained. And so, they might have plateaued. They grew for a while in the early days. Now they’re resource constrained, and they’re sort of right on the edge of, if I had this or that resource, I could double or triple the size of this company. But because I’m a smaller mom-and-pop type operator, I just don’t have the resources to be able to do that because I need the cash flow to live day to day. That’s a really good recipe for us to come in because we can come in, take a majority stake in the company or acquire a majority stake in the company, provide some big company resources to smaller mom-and-pop type companies, and that can really help accelerate their growth. That’s when everyone can win. So, recession-resistant industries, predictable cash flow, fragmentation and then operators who are resource-constrained – those are like the four things that I think we look for the most. And trades industries tend to have that.
John Bartlett
Great, great. So, let’s use your HVAC platform as an example. When did it start? How did it start? What was the initial investment that you made? Where is it today? And where do you guys plan on taking it? And within what timeline?
Logan Lowery
Yeah, it’s a good case study to sort of explain how we typically approach these investments. We started a portfolio company called Cascade Services in August of 2022. We started it alongside our co-investors, a firm out of Dallas called Trive Capital. Cascade Services is simply a holding company that was formed to acquire residential heating and air conditioning companies and plumbing companies, primarily in the Southeast. And so, we started relatively small. We brought together three smaller companies based in Florida in August 2022, acquired them all on the same day. Each of them fit into that category of being resource-constrained, but they were profitable businesses, typically owned by the individual who had started the business. He or she may have run it for 20 years. And for one reason or another, they’re thinking it’s now a good time to partner with a group like ours. So, we started the company at that point. Since then, we’ve gone on to make 10 acquisitions of heating and air conditioning companies. Most of those were in Florida, but we also have a few acquisitions in Virginia and Texas.
The value of folding brands underneath that Cascade Services holding company umbrella is really the resources that we can collectively have as a group. And so, what do I mean by that? At the Cascade Services level, we have a pretty big staff now. We have a CEO, we have a CFO, we have multiple accounting folks. We have an HR director, we have a marketing professional. We have other team members who focus on special projects. And really, it’s a pull model where the underlying brands that we have acquired, those 10 companies that we have acquired, they can reach up to the Cascade Services level resources and pull in resources. So, one company might need marketing help. Okay. Well, we’ve got a marketing director. Another company needs help with HR. We’ve got an HR resource. And so, we can sort of fly in and help these companies grow without having to burden those HVAC brands that we’ve acquired with the full corporate expense of having that many team members. So, sort of everyone wins together when you do that, and we can share resources across those brands. And we’ll continue to make acquisitions under the Cascade Services umbrella and grow the company over a four to five year period.
John Bartlett
So, let’s stay within the HVAC area just because we started there. When you look at the HVAC world today, both on the residential and the commercial side, and you’re talking to partners that are part of your portfolio or you’re talking to additional potential partners, what are some of the biggest challenges that you see in the market today from a business owner’s standpoint and how are you guys able to help them solve that problem?
Logan Lowery
Yeah, it’s a good question. A lot of it comes down to being able to define how it is that you win. And so, what I mean by that is we’ve talked to a lot of business owners who, whether they’re getting ready to sell or they’ve already sold to us, we say, look, you’re doing well, you’re growing. Why are you growing? And they don’t really have a good understanding of why they are doing it. It’s a lot of little things, right? It’s answering the phone call on the first three rings, right? And never missing a phone call. It’s calling the customer back if they have to leave a voicemail. It’s managing your Google reviews. It’s tracking your conversion rates or your other key performance metrics, right? And so, what we want to do is we want to be able to define how we succeed. And if we can do that, generally speaking, we can do more of the activities that lead to success.
And I think that’s where we can come in and, I hate to use the word, sophisticate the business, but it’s more defining the processes and procedures that allow us to win on a day-to-day, week-to-week, month-to-month basis. And a lot of business owners operate by feel and that’s okay. That’s led them to be very, very successful. But when we think about going from point A to point B and then being able to scale that business out into new markets, into new states, you’ve got to be able to define your process so you can then repeat it. And I think that’s where we can come in and do that across the board, whether it’s accounting, whether it’s marketing, whether it’s recruiting technicians, retaining those technicians, our marketing approach. There are a lot of different facets to a business as we all know. Let’s put it down on paper. Let’s define it and then let’s figure out how we win and then let’s do more of those things. That’s a big, big task. It sounds really, really simple when we sit here on a podcast, and we talk about it. But boxing it in, it takes a big team and it’s how we try to grow these companies. And typically, people are very receptive to that, right? Because everyone wants to be on a winning team and let’s go figure it out together. I think that’s where we can provide value to our operating companies.
John Bartlett
And what size company are you looking to acquire within your various thematic platforms?
Logan Lowery
So, every private equity firm has different parameters around size. We actually have a, you know, I would say a fairly unique flexible structure in that we can scale quite a broad range. So, on the low end, we’re typically acquiring companies that are doing $500,000 of EBITDA or cash flow profit. There are a lot of different ways that people would define how big they are. So $500K of profit on the low end, on the high end, we’ve got businesses that are making over $10, $15, $20 million of profit. And so, it’s a really, really broad range. But I think the important part of size is making sure that you’re partnering up with a group, whoever is buying your company, they’ve operated with other businesses that size before, right? You don’t want to sell to a private equity firm that only focuses on really big companies and you’re the smallest one in the portfolio, you might not get the attention that you thought you were going to get. So, it’s a good question to ask different potential buyers as you’re working through a process.
John Bartlett
Other than size, what are some other characteristics that you look for within an attractive business to buy or partner with?
Logan Lowery
The one that comes to mind quickest would be the management team. There are a lot of businesses where you’ve got an owner-operator and he’s a genius with a thousand helpers, right? If he or she walks out of the business, there is no business. That’s not all that attractive to us as a potential buyer because there’s key man risk, right? And so, we really like to see owner-operators surround themselves with a good team. That doesn’t necessarily mean you need to have a full big corporate team where you’ve got CFOs and HR directors and kind of the whole suite of C-level executives. But we really like to see a general manager, maybe department managers that are in place that have a full understanding of the business. It’s one thing to bring in managers underneath an owner-operator and you keep them really siloed. They know how to do their one specific task within the business. It’s another thing to have managers that have a holistic view of the business. They understand the different departments. They understand the profit and loss statement. They understand the key drivers. They’re involved in hiring and firing and retaining employees. It becomes more holistic. So, we’re looking at the team for sure.
The other thing that comes to mind is what systems the company is on, right? What accounting system are you using? If you’re on an operating system like ServiceTitan or Housecall Pro, that can be helpful. So those are two of the key things. There are probably 50 other things that I could talk about, but those are two of the big ones that jumped to mind right off the bat.
John Bartlett
We’ve talked about size of businesses, we’ve talked about geographical location of businesses, we’ve talked about sort of the infrastructure within the business. How do you value a business? How do you determine if a business is worth $2 million or $20 million? How do you guys look at that?
Logan Lowery
There are a lot of factors that go into valuation of a company. The most basic one and simple one that I think people naturally gravitate to first is how profitable you are, right? Typically, we’re going to look at your profit and loss statement. We’re going to see how much at the end of the day you’re taking home from a cash flow standpoint. And we’re going to apply a multiple to that. And that multiple might be three, four, five times six times. The multiple that is applied varies by industry. And it also varies by the type of mix that that company has. So, are you doing mainly replacement installs or do you have a lot of new construction? Those two factors have a lot of, you know, have different multiples, right? What geography you’re in can impact the multiple.
First step is applying a multiple to the cash flow stream. I think most business owners understand that that’s going to be a factor. Another factor that flows into that cash flow stream is, or that multiple is how long you’ve had that cash flow stream, right? If you’ve been cranking out the same level of profit for multiple years in a row, that gives us as the buyer confidence that that cash flow stream is going to be there next year, right? So, we might be willing to pay a slightly higher multiple. Conversely to that, if you’ve got really variable earnings that go up one year, down one year, we need to factor that in right to our purchase multiple. And so that’s the main thing.
Outside of that, there’s a lot of other subjective factors that are really, really important for us to understand. I mentioned the management team already. It’s hard to apply. How much does that move or impact the valuation, but it’s definitely something we’re taking into consideration. The systems that you’re on, how professionalized you are, what geography you’re in, what the local competition in that geography is. If you’re in a market where there’s a lot of competitors and you’re the best one, that’s one thing. If you’re in a market with no competitors and you’re the best in the market, that’s a different thing. So, we’re going to look at that. And then the last thing that comes to mind is just what is your differentiation to your local competitors. Is it price only where you’re just the low-price provider? Okay, well, that’s something we want to take into account. You know, are you providing a better service, a faster service? Do you sell a different product than your competitors? Those type of things. We want companies that are defensible. So, if your only differentiator is your price, well, that’s not that differentiating, right? It’s just, we were going to continue to draw. But if we do something different that the competitor down the road doesn’t have, and you can demonstrate that to us as the buyer one way or another, whether it’s through really good Google reviews or it’s through how long you’ve been in the market or, you know, there’s a variety of different ways. Those things all lead to additional value, which means we will pay more for a company than companies that don’t have those factors.
John Bartlett
When you buy a business, are you buying the business completely and the owner’s sticking around for a while helping you transition and sailing off into the sunset within a relatively short period of time? Or are you buying a piece of the business? The owner’s going to stay involved for a period of time and then he’s going to continue to participate in the potential valuation growth of his remaining equity. How do you think about that and how are those different outcomes structured?
Logan Lowery
Yeah, it’s a good question. The answer is we can do both. So, we are somewhat flexible. Not all buyers are that way. There’s no right or wrong way to approach this. It’s just depending on your approach; you need to structure it certain ways. You said, know, kind of breaking down the two different avenues. Avenue one is our preferred method. And that would be a situation where we or one of our portfolio companies, let’s use Cascade Services for example, since we brought them up earlier. Let’s say we’re going to go out and acquire a heating and air conditioning company. We would typically come in and buy a majority ownership stake in that business. And so that would be probably 70, 80 or 90 % of the business on average. The remaining delta there, that 10%, let’s say, let’s use a 90, we buy 90%, the seller retains 10%.
We will let that seller maintain that ownership up at our holding company level. So that seller then becomes a minority owner in their business, but also all of the other 10 businesses that Cascade has previously acquired. Right? So, everyone’s aligned there, and it creates continuity, and it aligns incentives. What do mean by continuity? The seller can then go to his or employees and say, look, I needed to take some chips off the table to protect my family, needed to put some cash in the bank, but I think this is a good thing to partner with this company. And I’m willing to put my money where my mouth is in that I reinvested back into the company. So, I’m still an owner. I’m involved and I’m going to continue to be here. So, in that Avenue one route, that owner typically stays on board, continues to run the business day to day, making all the local decision making, hiring, firing, picking which products they’re selling, selling to the customer each day, just like they were before. And they just do that for a salary. So, they become an employee of the company, and they’re still involved for some period of time. Sometimes that’s one year. Other times it’s five years and it’s a really smooth way to transition that ownership where you’re still involved, but you take some chips off the table. It’s not black and white here today, gone tomorrow. That’s our preferred route.
John Bartlett
So, in the example that you just described, the owner sold 80, 90% of the business. He continued to retain 10 to 20% of the business for maybe a three to five year period. And then what happens ultimately to the 10 to 20% that he continued to hold?
Logan Lowery
Great question. So, we as a private equity firm have capital that’s been raised from investors and those investors require us to return capital to them in periodic timeframes. And so, what that means is we typically own our investments for four to five years on average. And so, depending on when that seller in this example sold to us, it will impact when we sell our company.
Let’s say that they were with us from day one, we buy the business, we buy 90%, they keep 10%. They would be an owner for the next five years or their balance, give or take. We would then sell the holding company, of which they are a minority owner in, to another private equity firm typically. And at that point, that owner would be able to sell his shares at the same time we sell our shares to that next private equity owner. And so, you’ll hear folks in the industry say that this is the second bite of the apple. And what they mean by that is you sold your business or at least 90% of it on day one. So that’s the first bite of the apple. You maintained a small ownership percentage for five years. And then the company that you’re an investor in sold again. So, you get that second bite of the apple. The reason you would want to do that is for that continuity that we talked about, but also equal in importance, there’s an economic reason why you do that. And it’s because if you still have skin in the game, we are growing the value of our investments. And at many times that 10% that you reinvested on day one in four or five years, it’s worth multiples of what it was when you invested. And so, you kind of get to sell your business twice.
John Bartlett
Let’s talk about the employees. If a transaction like this takes place, how do you guys view the employees and what’s the impact on the employees and how do the employees feel that there’s new majority ownership now? And in parallel to that, how do the customers feel that there’s any change in the business at all?
Logan Lowery
Sure. So, let’s start with the customers first. Typically, the customer has no idea that there’s been a business sold, especially in residential service -based industries where you’ve got a house owner who’s calling up a contractor to do some work for them. They have no idea that that business has been sold to us. And so, it’s really seamless. And this isn’t the case for every buyer, but at least for most of our companies, we don’t add our brand name to the trucks, the techs don’t wear a different shirt. Literally everything external facing to the customer stays the exact same and that’s on purpose. So, no shake up there. For the employees, we really think that in almost all cases it turns out to be a better situation for them because we can get economies of scale for the things that affect the employees.
We typically want to move the employees to a new benefits plan. So medical insurance, dental insurance, vision insurance, those type of things. We will take them off of the existing plan and move them to our plan. Generally speaking, our plan tends to be better coverage at a better price only because we have many employees, right? We have 10 companies that we’ve acquired that are folding under that plan. So, we can get better pricing. So that’s one thing that impacts the employees. We don’t want to change their compensation structure for the most part. We like to keep compensation structures generally the same across our companies. So sometimes there’s tweaks here and there, but the spirit of it is we never want to take an employee backwards, right? We always want to give that employee the exact same potential to earn as much as he or she was before.
And so, we found that if you do it that way, the employees aren’t negatively impacted and oftentimes they’re energized by hearing about an acquisition. I think so many business owners, rightfully so, are very, very nervous to let their employees know that they’re potentially going to sell the business, or they’re concerned about when they do share with their employees that the business was sold, how those employees react. For the most part, I would say.
There’s really, really positive reception to that because most employees want to be a part of a winning team. They want to be a part of a growing company. And so, if we can come in and tell the employees, hey, look, you guys have been, you built a really good business. We just paid a lot of money to acquire that business. That’s how you know that we think highly of what you guys are doing. We’re not here to change what you’re doing. We’re here to add to it. We want to do more of what you guys are already doing. People respond well to that, and they want to grow because as the company is growing, know, rising tide, you know, brings up all boats, right? It gives more opportunities for those employees that are already there to take on additional responsibilities, earn more, be a part of something that’s growing, and we can bring those resources to help them do that.
John Bartlett
Yeah, good points. We’ve talked a fair amount about partial sales, rollover equity, the owner staying involved in the business. Let’s talk about the other option. Let’s say it’s an older owner. He’s in his 60s to 70s. He’s ready to turn the page. He’s ready to retire. He’s ready to move to Florida, play with the grandkids, go play golf, whatever. And so, you talk about the rollover equity, you talk about the three to five years, and he’s like, no, I’m on a different timeline. How do you think about those businesses with an older owner that’s got a shorter transition timeline? In that example, what are you looking for the owner to provide post transaction in terms of a transition period?
Logan Lowery
So, we can definitely be accommodating to that structure because like you said, there’s many good businesses out there that the owner is just not at a period in his or her life where they can, they want to be on the ride for another three or five years. So, we have instances where we’ve come in and we purchased 100% of the business. So, the seller can take all the chips off the table. When we do that, we typically always want some type of short-term transition period. And that transition period can vary company to company, depending on how sophisticated the company is. And when I say sophisticated, I’m simply talking about how buttoned they are around their processes and procedures and those type things. Generally speaking, I would say six months is kind of an average that at least we look for. Maybe other buyers would want shorter or longer.
John Bartlett
Right.
Logan Lowery
The big thing that we want to make sure that we can plan for though, is a longer term transition. So, if a business owner is willing to commit to us for six months post transition, that’s great, but we’re going to be sitting there thinking what happens after that six months? And we need a lead. We have to replace him, and replacing those owners is very difficult to do. And we don’t really like to take that risk blindly, and what I mean by that is saying, look, let’s close this business and then we’ll find somebody to help us out. That presents a lot of risk to us as the buyer. Conversely, we don’t like to hear an owner say, well, I’ve got a number two here within the company and he’s great. He could take over the business. And we say, okay, well, that’s great.
What’s he doing today? Are you bringing him into those key decision-making? Does he have visibility into all aspects of the company? And you say, and the business owner says, no, I keep everything close to the vest. He doesn’t know anything, but he’s got the potential. That doesn’t give us a warm and fuzzy feeling either. And so, my recommendation to those sellers who think they might want to go down Avenue two is start to release some of the decision-making and control and give some reins up to that person that you have, start grooming them, training them so that when it’s time to sell the company, they are doing the job already that we are hoping they can do. That gives us more confidence to go down this second route.
John Bartlett
So, think of what the end game is, think of what buyers are looking for, think of how buyers are going to measure the risk and position the business to be attractive for that buyer one day. Is that what you’re saying?
Logan Lowery
That’s right. I think if the business wants to continue to live on after that, that’s the best way to do it. There are other routes too, right? If we have a business in that local area that can absorb that company, that’s one thing. But I don’t think that sellers or potential sellers should think about that, right? If you’re, if you’re limiting your buyer pool to only those businesses that can absorb your company underneath a brand that they already have, that’s down the road. The number of potential buyers gets really, really small. You want to broaden the number of buyers that you can. And I think that’s how you do that. As you start six months to a year in advance and you start to demonstrate that you, the owner, are not required in the business on a day to day. And that’s how the business can outlast your presence there.
John Bartlett
Good, good. We’ve talked a lot about HVAC. You’ve mentioned roofing a couple of times. When you look at where your firm either currently has investments or is considering making investments, what would some of those additional potential categories be?
Logan Lowery
So, we have investments in heating and air conditioning, like I said, both on the residential side and the commercial side. We’ve got collision repair investment. We’re working on a roofing investment right now. Landscaping is another one. Property management is another one. We’ve got a few other industries on the whiteboard, but it’s service-based industries. A lot of them tend to be home services. Does that answer your question, John? Kind of types of industries that we’re looking for.
John Bartlett
Yeah. And is there a particular part of the country that’s particularly attractive to you or there are areas that you want to stay away from?
Logan Lowery
It varies by industry, as you might imagine. What I’d say is generally speaking, we want to be in markets where people are moving to, right? That’s probably not surprising to you. And so, we want to be in business friendly states where people are moving to. Those are all tailwinds for us as an investment, right? We don’t want to be fighting against the tide.
Roofing is a great example. State by state can really, really change the dynamics of roofing companies. Some states are very dependent on storms, others are not. Some are insurance-driven states, others are not. So, it depends on industry, but we typically try to be very concentrated in our geographic focus. And so, what you won’t see us do is take a shotgun approach where we’re buying companies on the West Coast and the East Coast all at the same time. We’re going to be very concentrated.
John Bartlett
Yeah, makes sense, makes sense. Well, this has been awesome, and I appreciate you taking the time and I’ve learned a lot and I hope our listeners have benefited from this as well. Is there any final words of wisdom that you would impart to potential owners and founders that are thinking about selling their businesses down the road?
Logan Lowery
Start early. It’s a longer process than most people think. Not only going through the process, if you decide to have an advisor represent you, I generally think that that can be very helpful in a process. That probably sounds counterintuitive because I’m typically in the buyer’s seat, but think, well, an advisor might work against you, right? He might be trying to drive up the price and get more buyers to the table. Yes, to some extent that’s true, but at the same time, an advisor can walk you through the steps that are very common in a process. And as us as a buyer, that can be very helpful to have an intermediary that is really on the seller side, but understands the steps that we’re going to want to go through. So, picking an advisor can take longer than you think. You really want to find someone who knows the space, that can represent you well, and that knows the buyers.
And then also going through the buying process, right? It’s typically a couple of months to get all the paperwork set up where you can really actually go represent your company. Well, buyers need time to review that material. And then once you negotiate an agreement, typically the buyer has some period of time, call it 60, 75 days to perform diligence and then actually close and wire the money.
Depending on the different steps, that can be a six-month or even a year-long process. And so don’t wait until you want to sell next month, start thinking about it a year, two years in advance. I think that would be wise of business owners who are considering what they want to do going forward.
John Bartlett
Good advice, man, good advice. Well, listen, thanks again for your time. You’ve been more than generous. we’ll put your contact details down in the show notes. And if anyone wants to reach out to you directly, they can. And we’ll talk again soon. Thanks so much, Logan.
Logan Lowery
Absolutely. Thanks for having me, John.
