Playing Small Ball | Ben Stegmann

Ben: Thank you very much. It's good to be with you all. I'm gonna try to provide the opposite end of the spectrum that you just heard.

As Peter said, my name is Ben Stegmann. My business is 2nd Mile Service Company. I'm a guy with an unhealthy obsession, for buying businesses. Love to do it. I wanna give you a really a main street, boots on the ground perspective.

Typically, I buy home service specialty construction businesses. But before I did this, I was doing CMBS securitization in 2006, 7, 8, 9. So just keep in mind that I'm the guy that helped take down the economy. So anything I tell you, you may or may not wanna believe. But my goal is really to help inform, you guys and maybe equip and empower you to to go pursue your entrepreneurial journey.

If I try to sound impressive, I'm not, and you'll see that quickly. But I just want you all to be able to, maybe take something from this that would, help you along the way. And if I say something remotely intelligent, I probably stole it from somebody else. So, please feel free to do the same for me. I'm gonna give you the profile of the first business I bought.

It was 2,011. Raise your hand if you're in for this deal. 90% customer concentration with 1 customer, 100% dependent on residential new construction. Again, 2011, 9 employees, 1,100,000 in revenue. I don't have to tell you that I had no investment thesis or plan.

I really had no idea what I was doing. So why did I buy it? Well, for 1, again, I just didn't know any better. But 2, it seemed like a decent opportunity because, I ended up buying it for the value of the equipment. So I figured, well, if all else goes wrong, I can sell off the equipment, maybe get my money back and and live to see another day.

But, really, for the 1st 3 to 4 years, I was 100% passive, doing a little bit of real estate development stuff. And, thankfully, I was blessed to have a great individual that was running the day to day of the business. But as the housing market slowly recovered, our business grew, and we outgrew the building we were in. And so I started looking for a new space to, to move us to, and I found this perfect building. Great location, exactly what we needed.

The only problem was, it was twice as big as we needed. But I couldn't pass it up, so I ended up buying the building and moved our business in there. It wasn't a building that you could divide and, like, split into 2. So, we had this building, all this expense, and only were using half of it. So I, I went out looking for another business literally just to fill the other half of the of the building and try to, absorb some of the costs.

So unless you think this was a highly sophisticated, like, HoldCo strategy, it wasn't. Yeah. I was just trying to keep my cost down. So I started looking for any business I could find that might have customer overlap or or maybe similar to what we were doing, just in hopes that, that I could throw some cash at the, mortgage every month. But in 2008, did my second acquisition, so quite a long time.

But since then, become really active and kinda got addicted to it, like I said. I've done 20 transactions ranging on the low end from only $25,000 on the high end of 2 and a half $1,000,000. What's unique, though, is that all of them have been directly sourced off market deals, never raised any outside capital, or used an SBA loan. So I'll get into that in a minute. But, this year, you know, we're about 140 employees, 30,000,000 in revenue, and just kind of been, getting, the snowball rolling, as they say.

I think one thing that's really important that I've learned is that, you gotta know what game it is that you're playing. And, you know, I think we'd all love to buy a highly recurring recession resilient business, 10,000,000 in revenue, 2,000,000 in SDE operator in place. But for me, a guy who started with relatively no capital, that wasn't that wasn't the game I was playing. I also didn't have a a huge risk tolerance for personally guaranteeing a lot of debt. And, so I was just outgunned at that level.

And so, I found this niche in kind of a sub institutional market, by taking an entrepreneur entrepreneurial approach to to doing m and a. So I I titled this playing small ball just because I'm a guy from Saint Louis down the road. We like the Cardinals. And the idea for me is get a guy on base, put him to 2nd, sac fly to 3rd, whatever it is, but just slowly move your, your players around the field and, and try to win the game by, by doing it little by little. Again, I kinda reference this, but but this approach isn't right for everybody, and I wanna give you the disclaimer.

I've made way too many mistakes to count and look it out in this room. I know for a fact that there's a lot smarter people here than I am. So, you know, take what you like, forget what you don't, but what I would encourage you, with is just, run your race. It's gonna look different than everyone else's, and that's totally fine. So just be comfortable in that.

I think for a long time, I wanted to recreate what someone else did instead of just saying, hey. This is my lane, and I'm I'm gonna run-in it. So I thought I'd share a little bit about my approach, just how how I've sourced deals and, and and kinda done this. And especially when you're dealing with off market deals, I can't overemphasize the importance of relationships enough. You know, there's an old saying that says, if you wanna frustrate transactional people, just slow the process down.

And, you know, I think it's naive of all of us to think that we're gonna go meet a guy or gal who's owned a business for 40 years, shoot him an email or cold call or drop him a note, and then they're gonna be just magically ready to sell their business, like, in a week or 2. Right? But, for some reason, we kinda continue to believe that myth. So I think we've gotta think in terms of years, not weeks or months. And just a quick story on that.

I just bought a business 2 years ago from a guy. I met him once a year, every year for 7 years. And finally, on the 7th time, we met, he's like, hey, Ben. I'm I think I'm ready to sell my business. Let's talk.

And ended up closing that transaction. A lot of them, if they're gonna continue to run their business, need help, and or just want someone to talk to, hang around the hoop. But, I think before they're ever gonna sell you the business, they wanna know, can I like you? Do I trust you? Are you someone I wanna spend time with?

And that's worked well for me. The other thing, as I mentioned earlier, was I'm not real keen on signing on for a big personal guarantee. So before I, ever proceed, I do I I call it the lifeboat drill, and it's just simply this. If the ship sinks, can I make it out alive? So, you know, but I I've had opportunities to buy big deals, but that's not me.

And I just didn't wanna I didn't wanna stick my neck out there, kinda like Brent and Morgan were talking this morning about paying off your mortgage. Maybe it makes financial sense, maybe it doesn't. But for me, just that, value of being able to sleep at night was, really important. So, if the answer is no, I won't move forward. I don't care how great a deal it is.

And it's, I think, Buffett said, don't trade something you need for something that you want. And so that's kind of been my mentality. On these small deals too, I think we call them businesses, but you gotta really ask yourself, what am I really buying here? Right? Sometimes, it's a business, but sometimes you're just buying a brand, a long standing brand name.

Maybe it's a path to getting a license in a particular trade or field that you need where the owner will sponsor you. Sometimes it's a lead gen source where you're buying a really good website or phone number. Maybe it's technical capabilities. They know how to do something you don't. You wanna do that or offer that in one of your businesses and kind of bolt it on.

Of course, aqua hire was kind of a popular theme for a while there, especially in COVID, and you couldn't find people. So you're really gaining their team is the primary objective. Sometimes it's just equipment, like I said, in the, in the first business I bought. And again, I don't think there's a right or wrong, but you just gotta know what it is you're buying and make sure it fits your model and price the deal accordingly. In terms of structuring deals, I think this might be a Brent's line, but I always use it.

It's really helped me. And it's just you pick the price, I pick the terms. And the seller always kinda looks at me funny. And, but I find it's really disarming to them, and it helps them know that I'm not here to lowball them or try to negotiate some cheap price. So I always tell them is this still working?

You all hear me? I always tell them. I'm like, you pick the price. I pick the terms. What do you mean?

Well, if you want a $100,000,000, I'll pay you that, but it might be a dollar a year for a 1000000 years. Right? Like, there's there there's different ways to do it, but it's just it kinda gets that elephant in the room right on the table, and I think it's really helpful, right out of the gate. All our deals are generally at least described as somewhere in the 1 to 5 times multiple range, but sometimes we're really just buying equipment, but, you know, we have to package it differently for the seller. I'd say, seller notes are really common in my my deal structure, especially in these smaller deals that, again, are off market.

And I found that sometimes sellers care more about the total purchase price than they do about the real take home proceeds. Right? So they don't always appreciate the time value of money. So they may give you a nominal or 0% interest rate over 8 or 10 years because it it yields them a higher number, and they go tell their buddies that, hey. I got this instead of maybe something that would actually make more financial sense for them if it was cash upfront.

Another thing is and I don't have to tell you all this, but, you know, a lot of these businesses, their books are a mess. Right? And you can't make heads or tails or maybe there's a negative trend line. I'm seeing that a lot right now where, you know, 2018 was was a good year. 2019, okay.

It's just progressively getting worse. And, of course, the seller wants to go back to 2018 and say, that's the number I wanna use. And, of course, I wanna use the, you know, 2022 or 23 number. And, you know, there's different ways you can do weighted averages, whatever it is. But what I found successful, there are cases where, yeah, you can't make heads or tails with their p and l.

We just agree on what what do you make every year percentage wise? What is the margin percentage that you make? And we kinda look and talk and typically will agree, and, we do more of a royalty driven deal with them. So I say, hey. I'll buy your assets if you have any upfront, trucks, equipment, whatever, and then I'll pay you a royalty on future sales.

So let's say we agree that you're making 8% net margin. I'll give you 8%. You could do it monthly, quarterly, annually for the next 3 years, as a way to to compensate you for that. Of course, for me, it protects me if it goes to 0. Theoretically, I don't owe them anymore.

And if we can do our part and grow the business like we hope, then they can yield more cash than they would otherwise. So maybe just a different approach there. Always try to load as much as I can into the asset side, of course, for tax depreciation and, and all that. But I would say, when it comes to the diligence process too, one of the main features I'm offering sellers is simplicity. And, you know, what I mean by that is they just wanna they just wanna be done, like, from a one transaction standpoint.

So it's not uncommon on these little deals. We'll buy a business or all their assets, and we're literally dropping a dumpster off, at closing and loading half the stuff into a roll off dumpster and, like, never even, you know, moving it if we're gonna move the business. But for them, it's just one and done. They don't have to think about it. They don't have to deal with it.

The other thing is, you know, I I typically do my own due diligence, and, and sometimes I can overcome that with deal structure. But secondly, I do a lot of my own legal work. I had a lawyer, an attorney draft a document that I used on the first transaction, and then I edit, that document for purposes of this. And a lot of sellers, again, at this small level, they like the fact that I'm not bringing in a big law firm and then they've got a lawyer up. And just a quick story on that, I I actually was doing, something last year and I forgot to delete out part of the previous transaction.

And the seller called me and was like, hey. What's this? And I'm like, oh, crap. You know, I just blew it. And what I found was it actually earned credibility because he he didn't believe that I was doing my own legal work till he saw that.

Then he's like, okay. This guy's really doing his own legal work. Right? So, so again, I just I kinda take kind of a a common man approach with this stuff. And I will say this too.

This may this may shock a lot of you. It's not uncommon on these deals that we're signing the, the the purchase agreement the day of closing because these are again, they're proprietary deals, so it's not like they're talking to 10 people. I'm not rushing to tie it up as fast as I can. I'm doing a lot of my own due diligence legal work. Sometimes I will bring in help if it's, you know, something more complex, But I don't have a lot of capital tied up in it.

I've got a lot of time tied up in it. But they're you know, these sellers typically are just nervous and it's scary to them. And so, you know, I just keep trying to couch everything in that relationship context and we'll we'll sign the purchase agreement, then I'll give them the check and we'll sign the closing documents. So that's happened a lot. And I think, in a world full of contracts, like, the the stuff I'm doing, handshakes really matter in honoring, you know, kinda past, promises that I've made throughout the process.

Couple more real quick post closing. Just I think there's a psychological value of keeping the seller involved. They all say that they wanna be done. In some cases, that's that's true. But some cases, they just wanna be done doing the parts of the business they hate.

Right? So it's I I try to structure some kind of a consulting agreement for them even if it's very nominal because it gives them a psychological sense of, hey. I'm still gonna be involved on an ongoing basis. And a lot of times, they have a lot of value whether it's relationships or knowledge to add. But more than anything, it doesn't feel like they're gonna, like, have their arm amputated when they sell their business that they've had for the last 40 years.

And then, you know, doing these little deals, I mean, once you kinda get rolling, my goal is just to rinse and repeat. Right? Stack them on top of each other. Clint, actually, I told him last night, never met him before, but he has a great tweet about this whale shark mentality, and that's kind of that was really helpful for me because if you haven't seen it, go look it up. It's really good.

But, my goal is to to let these things you know, get our platforms establishes established and then let them compound, over time. So I'm just gonna give you 2 quick deal profiles, and, and then I'll wrap up. But in 2018, we bought a a fence company, called Kirkwood Fence. The business had 280,000 in revenue at the time. It had 4 employees and a burned out seller.

This was one of the sellers that actually took he said, I will take less money to walk out of here and never see you again. So I said, great. Every single employee failed the preemployment drug screening test. So at the day of closing, we had 0 employees. We had 2 trucks.

1 ran, 1 didn't. And this was one of the cases where most of the stuff went in a roll off dumpster. I remember the first fence job we did. We put some guys out of our other division. They were standing on the job with a YouTube video, how to install a fence.

And, it was great. Hey. Why did I do it? Well, we bought a business. It'd been around for 40 years.

It had a really good reputation, and it was the number one organic Google search result for Fence in Saint Louis at the time. And I bought it for $60,000. So, you know, that was the idea. And I, we we re kinda built that whole company under that brand. Again, that was well known.

And, 5 years later, we'll do close to 10,000,000 in revenue on that business. So it's it's just was one of those opportunities that, you know, makes sense. One other quick one. I've, we're in the pest control space too. And, I've been wanting to get into pest control for a while, but it's a pretty closed business, community.

Clay can probably tell you, but they all just sell to each other and, couldn't get in. So I finally had found 1 on Craigslist, and the guy says, hey. Come meet me at this Applebee's down off the highway. And I'm like, babe, I might get stuffed in a trunk tonight and be dead. Craigslist killer.

You know? So I met him down in, at Applebee's, and I found out he he finally tells me he's being investigated by the EPA. Apparently, you can't, like, loosely splint sprinkle rat poison around a day care. And, so, thankfully, that tied to his license and not the business, but he was running away to New York. So he had, he had 3 technicians, a small book of business, but it it gave us a path to getting a license.

So ended up buying it, and then, next year, 2020, someone really well connected in the industry said, hey. I know a guy who's got a really little business. This was the $25,000 business. He's dying of cancer, 79 years old. Would you have any interest?

And I thought, well, sure. So, met the guy. He wanted to show me how he does his job. He had a big account of fast food restaurants, so I had to meet him at midnight at a fried chicken restaurant. So he was gonna show me how he did pest control.

But I really, grew to love this guy. I had a lot of empathy for him, Probably paid him even more than his business was worth, but I just just really thought, man, this is a neat guy. And, so we closed in the business, $25,000, and about a month goes by, and he calls me. He goes, hey. I've got this other friend, and he's got a pest control business, and I think you should talk to him.

He wants to sell. Talked to him, and, one thing led to another, bought that business. And so in the last 3 years, we've made 12 acquisitions in pest control all from owners or past sellers introducing us to their friends. So, it's just been a really successful adventure for us. But, again, you treat people well and, keep it simple and, it comes full circle.

So getting a seat at the table there was key for us, and it's hopefully, continue to snowball from there. So just three words of encouragement. And, you know, you've heard a lot today, but I would just encourage anyone who's thinking about getting into small business, buying a business, have a bias towards action. Just do something. Probably twice a week, I have lunch with somebody who tells me, you know, about the ideal business they wanna buy, no money down, don't have to do anything, whatever.

And I walk away, and I'm like, they'll never do it, you know? So if you wanna do it, just do it. Get in the game and, and get going. The other thing, again, I said, especially if you're gonna take the approach I'm taking, you gotta play the long game. You you know, nothing's gonna happen on your timeline, so you just gotta be on the seller's timeline.

Keep showing up. Keep sticking around, and, you'll be surprised what happens. And then the last and final one is what I've found is it's been a lot easier to do deals after I did 1, you know, not only because I know the process and I've been through it before, but I think also because sellers now look at me and say, okay, this is a credible individual who understands the pain of owning a business, who's, you know, the real deal, so to speak. So once you get in the game and buy 1, it just continues to get easier and easier from there. So I'm happy to answer questions if we have time.

I don't know if we do. If not, you're welcome to ping me later. And, yeah, good question. I I, at times, sellers will stick around for free. Right?

And and I wanna be clear on these consulting agreements. They're not lucrative consulting agreements. I mean, we just agree. I always tell them, I say, you're worth a lot more than this, but I'd like to pay you some dollar amount per hour. Maybe it's $40 an hour.

So this is something like that. Right? Because I say I wanna make sure that we respect your time, and we're not just asking you to come show up all the time. And so there's some cost to us into the business. I think a lot of them would do it for free, but it's also a way of dignifying the role and also letting them know that, yeah, we are gonna prioritize their time and not just, you know, take advantage of them in that way.

But, to the seller financing question, probably incentive to stick around. I just I always kinda try to break it out as a separate conversation so that we talk about, you know, the deal, and then we talk about, okay, what happens after the deal? So yeah. So the question was on the pest control side, were they all in one market, all one did we consolidate them to one brand? So, yeah, the first one we bought, we ditched the name right away.

We started we call it Pure Pest, and, we started buying all these businesses and then phoning them into the name PurePest. So in all in Saint Louis, trying to overlap routes I mean, anyone that's in a route based business, you understand route density is key. So we've just been trying to stack route on top of route on top of route. Still small. Pest control is interesting.

It's $600 a whack. It takes a long time to grow organically, and that's an average customer value. So, yeah, I think we're somewhere we're approaching 4,000,000 in revenue on pest control, but still small in the small, you know, business world. So, yeah. Alright.

Thank you all. Appreciate it.

This transcript was generated with Transistor AI