173 Transcript

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merry christmas everyone and welcome to

the water treaters favorite podcast

scaling

up h2o folks if you have not gotten all

your christmas shopping accomplished yet

well you have one week left and if

you’re like me

and you do most of that through amazon

folks they’re starting to back up so

it’s starting to get pretty scary

whether they’re going to get your gifts

to your

recipients in time so go ahead and take

time for that if that’s on your list

you know i know that i have personally

learned

a lot this year i’m sure you’re the same

way you’ve learned a lot

this year some good some bad

but then again i really look at learning

it’s never bad now some of the things

we’ve had to learn during the year

2020 has been a little rough

for us to get through but let’s face it

we got through it

we’re getting through it and we are

learning from it as long as we can do

that

we are making ourselves better we’re

making our companies better

i always like to take december

to look back at the year and just

think about all the things that i

learned but then

also think am i aligning myself

in the areas that i need to be in

so i am forcing myself to learn

new things and this year the answer

is absolutely positively yes

when i look back at all of the things

that i learned this year

i learned a tremendous amount by

being involved in a mastermind now you

all know that i’m a member of a

separate mastermind outside of the

rising tide mastermind

so that puts me into contact with people

that i might not

ever have their insight about business

with

but as i mentioned i’m also a member of

the rising tide mastermind

and that allows me to talk with other

water treaters

to get their knowledge to figure out

what we don’t know we don’t know to help

us figure out blind spots and probably

most important

to help keep us all accountable

that we are growing as individuals i’ve

learned

so much through being part of

the rising tide mastermind for the past

year

i’ve learned a lot from my personal

reading

and i want to tell you a secret the

mastermind was responsible for several

books that i

read this year and i was being held

accountable by the members of the

mastermind that i would get those books

read

and they’re probably not books that i

would have read on my own so i

needed that constant nudge to make sure

that i read them

but i also have a personal reading list

i like to read

so many books every year and i normally

write that on my goal sheet and i check

off the number of books that i’ve read

in particular categories and folks

there’s so much knowledge out there

in books i’ve never read a book saying

that i’m going to copy this entire book

and get this done in my company or get

this done in my life

i always look for that one nugget that

i can put into practice it changes

everything else or to borrow from tim

ferriss

it’s that domino that gets all the other

ones

moving so i’m really pleased with how

i’ve checked things off on my personal

reading list

but i’ve also learned from the

organizations that i belong to we talk a

lot about the association of water

technologies on this show

but there’s so many other organizations

out there

their whole purpose is to get

information to you

their end user and folks if you’re not

taking

advantage of that i implore you

to do so they’re trying to find

information

they’re trying to figure out what they

need to distribute as far as information

so you can be involved

in that but then you can also devour

all of that information that they have

so you can become better at whatever

your goal is to become better at

i also have learned so much from my

peers i try to align myself with people

that are going to one help me

become better but that’s a two-way

street

i also want to help them become better

as well

so when you get involved in a

relationship with trace blackmore you

just have to

expect that i’m going to demand that you

get better and i’m going to demand that

you

help me get better and i will tell you

that

the friends that i have i have had for

years and i think it’s because we have

that

general expectation that we’re better as

friends and we make each other better

people

than if we were not friends so i hope

you have some relationships

in your life like that that you

are making sure that you both are

learning

throughout each and every year and then

it wouldn’t be

2020 if i did not mention

covet you know i got to check off living

through a pandemic

from my bucket list actually

no living through a pandemic was never

on my bucket list

but knowing me i’ll probably write it on

my bucket list because that would allow

me to check it off and those of you

that know me you pretty much know that

that’s a true statement

and yes scaling up nation i actually do

have a bucket list i said the words and

yes

so a little segue i don’t know if you’ve

ever done improv

training if you ever go to a class to do

improv comedy

and what they do is they set a scene up

for you

and somebody just starts acting out

something

it’s the most ridiculous thing that they

can come up with

and then what you do is you agree to it

and then you improve on it so the words

you use when you take over the scene

is and yes and then you do whatever

ridiculous thing you want to add to the

scene

and you keep doing that through the cast

of comedians

folks i bring this up because we’re

talking about learning and it just

popped into my head so that’s also why

i’m bringing it up

if you have never gone to a comedy class

and you are involved in sales

you are missing an incredible

opportunity

it’s extremely awkward at first but you

are going to

learn things about how to handle

situations that are awkward because you

cannot do improv comedy

without the entire thing being awkward

it will help you so much

with your sales training so if you

haven’t done that

i am going to urge you to do that maybe

that’s a new goal on 2021.

now if you don’t have a bucket list i’m

going to encourage

you to write one maybe another goal for

2021 is to have

a bucket list let’s face it life is very

short

and we do want to make sure we get done

in life

what we want to get done within our

lifetime

and if we’re not keeping score on that

well are we really doing that so i

encourage everybody that i coach to

create

their own bucket list and make it a

goal that every single year

you’re going to start taking items off

your bucket list you’re also going to

add

items to your bucket list because you’re

going to learn that you want to do

new things but now you have a way

to keep score i know retirement is

something that’s

on everybody’s bucket list everybody

aspires to retire

you know sometimes that means making

sure our investments are

properly planned uh getting our finances

in order

all the different houses so to speak

that we have to get in order in order to

retire that’s something we all have to

however if you are a business owner

a water treatment company business owner

this is especially true to you trust me

i know i fit

in this category the thing that i’ve got

going for me is i’m not looking to

retire

for some time so i’ve got plenty of time

to put things in order and i like to

think that i have things in order pretty

well

but you don’t know what you don’t know

and that’s why

i have invited our guest today to help

us out

with thinking what are the things that

we need to know

when it comes to the second act of

our water treatment company my lab

partner today is

michael wardy michael thanks for joining

us on

scaling up h2o and how are you today i’m

doing great trace how are you doing

i am doing wonderfully thank you for

asking

and uh before we get started do you mind

telling the scaling up nation a little

bit about yourself

yeah absolutely i guess even before

there

just thank you for having me on the show

today congratulations on the ray bomb

water technologist of the year award

obviously very well deserved

um just i continue to be amazed at kind

of the scaling of nation and the folks

that you bring on the show just seeing

incredible learnings from

legionella to leadership to the

industrial water week

of detective h2o things i just think

it’s an incredible

learning opportunity within the space

well thank you for that i really i

really appreciate that that means a lot

of course so yeah just a little

introduction to myself

i’m a midwestern guy i grew up uh just

outside of kansas city

and uh have always kind of had this

vision

of getting involved in the world of

infrastructure right it’s this kind of

unseen underappreciated aspect of our of

our lives that kind of drives

everything um and so i guess my actually

my first step

into this world and that led me to water

was actually in

the energy space so i spent the first

several years of my career i actually

bought myself a one-way ticket and moved

to china i speak chinese

and and i decided you know where we’re

better to kind of see that the future of

how we’re going to treat infrastructure

than in a place that

is spending billions on billions every

year on upgrading of of energy and water

infrastructure

so i spent three years three and a half

years in in shanghai

working in the world of solar panel

manufacturing

and so this is you know about 80 percent

of the world’s solar panels are made in

china nowadays

and so it was a really interesting time

my clients are typically europeans and

u.s companies looking to

to enter into this energy market and

trying to figure out how to do so

and so it was kind of a fascinating time

in a renewable energy

and in terms like a new

industrialization

and yet i kind of kept coming back as i

was over there

and this is i think something that folks

have come to under appreciate in the us

and when they go abroad

they begin to appreciate it but is how

we have

failed to appreciate our clean water our

sufficient water on a day-to-day basis

and so i always kind of talk about my

you know what is my come to water moment

and that really took place in just in my

apartment in shanghai

where you know i’d go to work during the

day and and

and work on very large energy projects

and then i’d go back to my apartment and

i wouldn’t be able to drink water out of

the tap

or you know my first time when i went

into my

in my newest apartment in shanghai i

turned on the uh the kitchen faucet and

a black sludge came out

right and so that is something that is

both very telling but also

kind of just you know in my kind of

entrepreneurial mind

and it gave rise to this question of

like how can i fix this problem

and then actually in my last summer

there there was some there was news

articles about 40

000 dead diseased pigs were pushed into

the shanghai water supply

you begin to think to yourself like this

is something that clearly there’s a

disconnect where

you know obviously energy is a big part

of our lives and and all that money and

time and effort needs to go into it

but we seem to have failed to remember

appropriately that you know

water is the one irreplaceable thing on

earth where

there is no substitute and so you know

at the time i i just said you know i’m

going to kind of come back the states

i’m going to figure out how to kind of

play a role

in this next generation of water

infrastructure and just started to

diving into the world of you know where

are there gaps

in the industry where is it technology

is it policy is it finance

and really think through how i could you

know obviously make a living but also

kind of drive change in this space

so i kind of came back to the states i

started off working for a

membrane company out of boston called

oasis water

that was doing a forward osmosis you

know it’s kind of like the reverse of

reverse osmosis

process focused on very brackish

industrial wastewaters i think like

fracking fluid or coal ash blow down

plants

where doing typical treatment isn’t

isn’t something that is cost effective

and

and so you need to figure out a way how

do we kind of meet our

environmental discharge standards and

then i

went and worked for a couple firms more

on the development side of new

decentralized wastewater groundwater

treatment processes

and so at that firm i was i was leading

our effort to

kind of upgrade and decentralize the

water infrastructure grid

and so typically what that looked like

was you know

in san francisco for example new

buildings over 250

000 square feet require 100 on-site

wastewater reuse

i was deploying systems to capture

wastewater produced in

high-rise residential buildings or

office buildings or kind of mixed-use

towers capturing that treating it with a

membrane bioreactor kind of similar

technology

and then redistributing that for toilet

flushing or

irrigation or cooling towers that’s kind

of really where i got

my first glimpse in taste uh into the

world of the water treater world

where i was doing that and then in los

angeles i was working on a couple of

different projects

focused on taking groundwater that was

leaking into

subterranean basements or parking lots

treating that and then reusing that for

cooling towers

i think the difference between those two

applications is in san francisco

that was more of a stick than a carrot

right that’s where

the government was saying that you know

you have to do this because we have

water shortages and

we need to figure out kind of what our

our water portfolio looks like

for the next 20 50 years but in los

angeles the goal and i think this is

similar to how a lot of folks are are

kind of treating this in the space is

this was a cost-saving measure

for the end client where we were

essentially reducing their sewer

discharge bills reducing scale and

corrosion on the cooling towers

while providing them kind of a good

service that that dealt with kind of

their

these uh this water leakage in their

basements so

that’s uh i guess that’s a brief

background to myself

i find that fascinating so water that

they were getting leaked in to their

basements they didn’t want it anyway

and you were able to send it up to their

processed water where they could use it

and they didn’t have to pay for it

it didn’t have to pay for it and frankly

it was a it was a nuisance charge that

they had

to pay for their sewer bills to

discharge it so it was kind of a

double benefit there very interesting

well

you definitely have an impressive resume

when it comes to

water treatment but you’re doing

something a little bit different now

tell us about that

yeah absolutely so you know i was

working on this decentralized wastewater

work for several years and actually kind

of the highlight that i

forgot to mention um was after hurricane

harvey hit houston

in 2017 i actually got called down with

with

actually my now business partner we took

about 18

wastewater operators down to houston

because their wastewater treatment

plants were offline

10 were offline and two were underwater

and really try and help them think

through

how do we create a more resilient

flexible

decentralized wastewater treatment

infrastructure for

uh for houston which uh unfortunately

has kind of had

several 100-year floods over the past

decade

and so you know that was kind of this as

i was doing that work and thinking about

the next generation of this more

flexible resilient infrastructure

that required decentralized treatment my

business partner and i

actually went up went off and kind of

hung our own shingle

in april of last year which feels like

you know 10 years ago now at this point

with all the stuff that’s going on but

we kind of saw that where the world or

envisioned we saw where the world was

moving in terms of decentralization

similar in in some respects traced to

telecom you know going from

landlines to cell phones and energy

going from

coal-fired power plants to rooftop solar

we saw in some respects the water

industry moving away from these

big centralized municipal treatment

plants that

cost a billion dollars and take 15 years

to build

more towards a reliance on at home

or at kind of commercial industrial

locations doing more treatment on site

and so when we started silmar about a

year and a half ago now

we initially were focused on just

helping a few of these new decentralized

treatment

companies do their work and so that that

took the the form of everything from

helping a company focused on

novel solids capture from wastewater to

even doing some work with a firm

that’s doing uh synthetic biology

basically engineering microbes

to treat things like you know say

legionella or

perfluorinated compounds those pfas

compounds that are in teflon coatings

but as we did that work can we kept

coming back

to this idea of you know when people

talk decentralization

in the water world they tend to focus a

lot on

wastewater reuse or like a culligan

style under sink filter

but as more and more of these water

quality regs come out

and you know even the kind of legionella

ashrae recommendations being one of them

it became a little bit more more and

more clear to us that decentralization

thesis actually has already been

happening for decades right that is

what water treaters do inherently they

are treating water

at the point of need to improve

industrial or commercial processes

so we spent the first year of our

existence i think like most

entrepreneurs

right we we kind of had left with the

vision

and we spent about a year trying to get

our feet settled beneath us

and as more and more time went on we

realized just how excited we were about

getting back into the weeds you know

selling building teams

solving problems operating systems and

we also tried to figure out you know

what does

what does sylmar look like 5 10

15 years down the road which is a tough

i mean it’s a tough thing to try and

figure out

when you’re kind of in it on a

day-to-day basis and so just about

around that time as we you know we’re

finally lifting our heads up to kind of

look around

we actually partnered with a couple of

different investors

and the goal there is you know silmar

now goes out and

buys and builds uh water and wastewater

companies

with a very very long-term focus so

we’re not a private equity fund you know

our goal actually is to

run businesses we’re i’m not a finance

guy i’m a water guy

and so the vision is to kind of run

these for

you know decades if not generations i i

think similar

in some respects to a thesis that a lot

of the owners of the scaling up nation

have

focused on creating something that will

last beyond themselves

and so really what what we do now is is

look for

owners of water treatment businesses

that have legacy businesses that are

looking to kind of transition into the

next stage of their life and

and want someone that they know and

trust to kind of come in

and operate those businesses for a very

long period of time

well see this is very interesting to me

because i’ve been involved with the

association of water technologies for

some time now

and this has been the age-old question

what happens

after i build a successful business and

either my children don’t want it i don’t

have any children

employees don’t want or their employees

can’t afford it

and now what do i do with this thing

that i’m so proud of that i’ve been

spending a lifetime

building so i’m so happy we’re talking

about this and in fact i’m going to

mention

in episode 127 we had tom hutchinson on

and he talked about this very thing so

this is a topic that he spoke about

at awt two years ago and then just

recently for the virtual convention so i

know there are so many people

listening that are either working for

companies that have owners that are

thinking about what their exit strategy

is or people that are actually looking

for

solutions because they have to do

something with this company so with all

that being said

what should everybody be doing about it

yeah i mean i think that’s a great

question tracy and i think frankly i

don’t have the answer

right this is a a question that is going

to be highly dependent on on the owner

and and each situation but i think there

are several options that

uh that we’ve seen out there um that

that will make sense for us for

for certain owners and so i guess the

the first thing i would say is

you know and this is just from me from a

personal perspective right a

multi-generational business is

what i’m building myself um and so if or

when that is an option for owners

obviously i think that’s great um i

think the reality of the fact is is you

know we’re in the water treatment world

which

which isn’t you know quote-unquote the

sexiest world of all times and so

sometimes we’ve seen the next generation

that isn’t as interested

in this business so you know i think if

that’s the case right

if you don’t have the next generation

waiting in line what do you do then

and i think there are a few different

buckets that maybe i can just list off

that i think will provide a little bit

of an overview for owners out there

you know first i think there’s the

private equity world or the venture

capital world

and these are a group of individuals

that typically go out and raise

some capital from outside financial

providers and their goal is to

kind of go in find interesting

businesses you know

they’re they’re typically looking for

businesses that have an

annual profit of over five million

dollars and about five million dollars

of ebitda

but they’re looking to create kind of

operational and financial value

from their acquisitions so typically

what you’ll see is certain private

equity firms will go in and acquire

a few different water treatment

businesses try and scale nationally

or just regionally and they also have

very i’ll say

grand expectations for the businesses

that they acquire

right so they typically are looking for

kind of hockey stick style growth

meaning you know over time you get kind

of an exponential growth of revenue and

profit

but they’re also looking at relatively

short time frames

so as you as you as you talk with a

private equity fund

you should ask is your fund a five-year

fund a seven-year

fund a ten-year fund because doing so

will help you understand can what is

their what is their vision for this

business is this something that they’re

going to

you know cut heads and put on some debt

and then seven years down the road sell

the business

or is it something that they’re gonna

run kind of in light of your legacy

for a long period of time the next

bucket is what i’ll call

strategics and these are the you know

great businesses right

these are kind of the nalcos the chem

treats of the world that are very

established

national firms do a great job and i

think

these these firms have their reputation

for a reason right they run great

businesses they’re able to scale

businesses once they kind of absorb them

into their into their umbrella i think

frankly they’re they’re typically

interested in in larger

businesses rather than maybe some of the

smaller one to ten person

shops but i think that the beauty of

working with a strategic is

they have success they have networks

they’re gonna help your business

further solidify or or mature it’s back

end just in terms of kind of accounting

processes and practices the question

always is how will they absorb

your business’s culture and that you’ve

worked so hard to develop over the past

several decades

and how will they absorb your staff who

who have been working under this culture

for a long period of time and so that’s

something just as you have those

conversations

it should clearly be a question that

you’re asking the third bucket is just

more in line of this this idea of seller

financing

which is if a third party financial

partner isn’t available or you want to

sell to

your your kids or to trusted employees

there’s an opportunity to

basically create a structure that maybe

there’s a little bit of upfront

money that your employees pay you but

then over the course of three five

maybe 10 years you create a contract

with your employees

to essentially pay you over a period of

time

for your equity stake in the business

and then

lastly i think there are frankly people

like myself

and silmar where we’re water operators

we have capital partners that allow us

to go out

and and make acquisitions and and build

companies

um and we also have indefinite time

frames so

we’re not finance people but we do want

to own and operate businesses over the

next several decades and i think

you know frankly we’ve i used to round

it all off we’ve seen a lot of folks

uh in the finance world that have kind

of been going around

talking to owners and saying that they

want to

buy your business and i think a question

that you as a seller

should always ask is do you as this

individual do you have committed capital

or do you need to go raise money once

you negotiate

an initial deal with me and how

experienced are you

in running companies in this water

industry right and we always talk about

water people right but it’s a serious

question of

you know are you going to take 12 to 18

months just to figure out you know what

sodium hypochlorite is

or are you going to be able to

understand kind of how you run

a treatment program for a customer

because i think

the concern and some of the you know the

horror stories i don’t think this is

normal right trace i i think you know we

hear the horror stories and we always

kind of inflate them in our in our minds

but you want to make sure that you as a

seller

are also diligencing your buyer

that’s almost more important for the

future of the company and obviously for

your legacy

is making sure that a this isn’t an

individual that’s just going to kind of

throw you around for 30 60 90 days and

then walk away

or be that this isn’t someone that’s

going to you know fire staff because

they don’t understand how a water

treatment program works

but that you’re actually finding someone

that can

own and operate your business for the

next 30 years

and do so in a way that will make you

comfortable as a previous

owner well let’s unpack a couple of

things that you mentioned

one with the climate going on in the

united states

we could be seeing some more gains taxes

so there are a lot of owners that are

pulling the trigger

sooner rather than later to figure out

what they’re going to do

for the next part of their business so i

think this is very timely

you mentioned a couple things one ebitda

i want to talk about that because i know

there’s probably some listeners out

there that are wondering what the heck

that is i know that’s a way

that we evaluate businesses but i also

know that people will look at revenue

and they put a but they put a multiplier

on revenue so

when you’re looking at a business what

are some of the ways to evaluate that

business

another great question you know every

investor is going to be a little bit

different

but i can talk you talk a little bit

more about how how i think about a

business

so ebitda which is ebi tda

means earnings before interest taxes

depreciation and amortization and so the

easiest way to think about this is

you know as you’re kind of looking at

your profit and loss statement or your

income statement

you’ll have your your revenues you’ll

have your

cost of sales or cost of goods sold and

then you’ll have your

kind of selling general and

administrative expenses which is things

like salaries and rent

and once you take revenues and subtract

your cost of goods and your revenues

rent

and kind of ongoing operational expenses

that will leave you with

uh your ipad number which is just kind

of just another way of

standardizing what is the profitability

of your business

on a quarterly or annual basis and so

as you think about you know how do you

uh value

or how do i kind of look at companies

there’s there’s a few different ways

you know one is kind of what is the

standing ebitda over the last several

years right

2018 2019 and 2020 is a little bit of a

strange year but actually i think

you know the water treaters the world i

think one thing we’ve found is that

this is very much an essential business

and so we we’ve seen

a lot of success over the last six

months seven months even though

the world’s been a little bit crazy so

we’ll look at things like revenue right

how stable is that

is it growing over time how stable and

his ebitda growing over time is your

profitability growing

and other items that we’ll always look

for is just kind of customer

diversification

right so are you are you someone who has

a great relationship

with you know i’ll pull them paper mill

and have just been working solely with

that client for the past 10 years and

that’s that’s your

entire customer base or do you have a

hundred customers every year that you’re

servicing

and the the reason why we’re interested

in that is just you know we’ve seen

some folks in in the water industry that

maybe were just working with

malls as january and february of this

year

and then march april may were very tough

for them and so it’s just trying to

understand you know how

how resilient is the business and then i

think

another kind of component that continues

to pop up in our own thought process is

how much of the business is focused on

equipment sales

versus the long-term service contracts

and and that just goes to again you know

as we think about

covet or even even 08 i think we saw

some of the same issues

of if businesses are heavily reliant

on selling systems selling kind of

fabricated skids

and not so much on the service component

than in 08 and in 2020 you know kind of

early part of this year um we’re pretty

tough uh parts of the year

and so i think our our goal is always to

kind of get an understanding for

how healthy is this business how

resilient is this business

and then again as we think about

valuations

you know tracy you mentioned kind of

there’s a there’s a question of do i

value my business based on

revenue or do i value based on

profitability and i’ll just say it again

i don’t necessarily think there’s a

correct answer

i think what what we’ve seen is

you know i consider myself a water nerd

so i’m just always kind of tracking new

interesting technologies in space

we’ve seen more growth scale

technologies kind of early stage

technologies

being valued on on a revenue basis kind

of a multiple of your total revenue

while the more stable businesses that

have been around

and been profitable and been successful

for the past decades

are valued more on a multiple of of

ebitda

and so that’s a small distinction but i

think it’s one that

you’re that the scale animation should

just be aware of as you’re thinking

about

what is my business worth i think that’s

a great explanation i remember reading

the rockefeller

habits by varn harnish and i think

he said that revenue was vanity where

net was sanity i like that i’m going to

steal it

i’m sure he won’t mind when we get into

the numbers and spreadsheets and

p l’s and balance sheets and cash flow

statements i know some people they

their minds just start to wander with

that we’re good water treaters

a lot of us don’t understand what the

numbers are actually telling us and

me consulting with other businesses one

of the first things we do

is i’ll get them to show me those

documents

and i’m not trying to embarrass anybody

out there in the water treatment

community but i am

surprised at how many companies out

there

run their businesses off of their

checkbook balance

first of all i i think it’s worked for

some people in the past right i mean

that

they’ve been living off of that

checkbook process for for years and

i think so i think that’s great for

individual businesses

i think what it what it lends itself to

though is a little bit of confusion when

it comes to making that transition

and so i think that goes back to you

know as i was running through those

buckets of

different potential acquirers or

partners on the financial side

is making sure that you’re choosing a

trusted partner

because i think as you think about what

does my ideal process

look like for this transition there’s

going to need to be

some trust that’s created there’s going

to need to be some

process that starts to kind of make that

transition from the checkbook

to uh i’ll say a more formal balance

sheet an income statement

that a typical investor can look at and

really really get a good feel for the

business

um and so i think that goes to that that

can be a joint process obviously again

you need to choose a trusted partner to

make sure that

that you’re getting a fair shake but i

do think that by choosing

correctly you all can work together to

come up with

kind of the proper valuation of the

proper price that somebody would pay for

you for

you know for your baby would you agree

that the time to start doing that

is now and not when you need to sell

your business

i would say that time to start doing it

is yesterday fair enough

wait which is it it was just more just a

uh a comment towards

that the the sales process and getting

comfortable with your eventual partner

is a many year process potentially and

doing so earlier rather than later will

make it feel less rushed

and make you feel more in control of

that process

as time goes on i want to make one more

comment on

your comment on getting your numbers in

line how i think about that

is you know water treaters are

constantly tracking and have log books

related to how

their water treatment is working on a

minute by minute hour by hour day by day

year by year basis everyone should also

be thinking about kind of the financial

background of their business as well in

the same way where you wouldn’t just

turn off your remote water quality

monitoring devices

and say you know let’s see what the tss

is in in six months because

because who knows what would come come

to be in those six months

so i think similarly on the financial

side really getting a hold for how is

your business

operating on a on a more routine basis

will allow you to kind of further refine

and

optimize the way you run that business

just like you run a chiller or a boiler

or cooling tower

it really is amazing what information

you can get from having good strong

numbers

and when you start tracking those you’re

able to see if you make a

change in your business how all those

numbers are

impacted so if if you haven’t been

convinced yet to get your numbers in

order i hope this dialogue today

has helped you consider go ahead and

getting that done

today now let me ask there are a bunch

of people out there

that myself included we get continuous

emails or voicemails from people

saying hey we want to buy your company

half of them aren’t serious half of them

are fishing for market information so

when we get that phone call we get that

what should we do yeah that’s a great

question right

sometimes owners have a have a choice of

you know do i want to run my business or

do i want to talk to

brokers and investors all day and i

understand that the former

uh should always win and so i think the

the thing that

that folks can do kind of on a on a

near-term basis

is first just kind of go do go do a

quick five to ten minute

search on the website of that individual

right learn

about their mission their vision their

values learn about you know

is this a water person or is this

someone that’s just coming in to try and

find a business to run

um and likely will need a lot of hand

holding in order to get to a successful

place so i think that’s kind of the

first step is just

you know does this pass your bs sniff

test based on looking at the website

i think after that which will probably

help you and

and trace you know based on your

comments sounds like it’ll probably help

you weed out about 95 percent of those

people

i think then getting on a phone call for

30 minutes right

keeping it almost intentionally short

for a first call

just to allow yourself and the potential

acquirer

to or investor to introduce themselves

get a feel for them as as people

quiz them on like what do you know about

my business what do you know about my

industry and why are you reaching out to

me today

and so i think there and again this is

you know for individuals that are

looking to sell

today there’s a there’s a way of doing

things and for those that are looking to

sell 10 years from now

there’s a way of doing things as well

but i think from from my perspective

you know having the conversations with

that top five percent of potential

partners

is really helpful just kind of keeping

your rolodex or keeping your linkedin

as the individuals that you would want

to reach out to as you think about this

a little bit more seriously

down the road now during that

conversation how much information should

be giving to that person it depends on

how comfortable you are you know i i

come from a place where

you know a handshake is more important

than a contract

but i also understand kind of the

sensitivities around

customer relationships financial

information

so i actually i always tell owners that

i talk to to

to not share very much information at

first to

get a better feel for that potential

investor don’t tell anyone you know

your revenue or your or your ebitda or

kind of who your customers are

necessarily

upfront unless you want to of course but

wait until you kind of get a better

indication for who is the other person

on the other end of the line

and where you should start feeling more

comfortable

is once you get a non-disclosure

agreement into place

whether it’s called an nda so once you

get an nda in place with that investor

they’re kind of legally bound not to

any of the information that you pass

along to them so um

that’s kind of a two-step process of one

get a feel for them as a person

and then if you think it’s worth

speaking to further and you want to

share some more information to

potentially get a

kind of an estimate of what what they

might be willing to spend or pay for

your business

then make sure that you get an nda in a

place get them to sign it you counter

sign it

and then you can start sending a little

bit more information over time to them

so that they can get a better feel for

the business and maybe give you some

numbers to think about

that’s great advice i can think that

there’s probably two

top concerns on every owner’s

mind that is considering selling

one is can i get enough money for my

business so i can take care

of my family during my retirement or

whatever the next venture is going to be

and two what about all these key

employees

that have helped me build this business

how do i take care of them

yeah exactly i mean this is something

where when you run a business

over the course of decades kind of all

of your capital and

and net worth and you know frankly your

retirement fund is kind of

built into that business and so i as you

think about

you know what is the next step for me

there’s two general paths you can take

right there’s the

i’m gonna sell my entire business 100 of

it and walk away

and be able to care for for myself and

my family

number two is selling a portion of the

business or

uh even if it’s a majority or over time

selling more and more to employees

so that’s kind of a i’ll say a minority

sale to start

but as you think about you know how do i

quote unquote

you know monetize my retirement fund and

this is the age-old question

and so you know there’s there’s a couple

ways to do it one is just go out and

find

that third party financial company the

private equity fund the silmar group the

strategic of the world

um and get them to pay for your business

and you know find the right partner to

make sure that they’re going to

treat your employees well and live up to

the legacy that you’ve created

and on the on the latter part on the

minority side

there’s a lot of ways that owners can be

creative in terms of making sure that

that they will be taken care of right so

there’s

selling selling equity selling a portion

of the business

but there’s also ways where you can you

know stay on as an employee or as a

consultant if you’re if you’re

transitioning to imp to your other

employees or the next generation

there are ways that you can create

seller financing

contracts where like i said earlier you

know you’re

creating a contract where your employees

will pay you for your equity over a

period of time

from the profits of the business and

then i i guess another thing that you

know

i never really like to recommend because

depending on who the owner is they may

or may not be super comfortable with it

but

you know going out and these businesses

you know your businesses

tend to not have very much debt on them

at all you know debt is sometimes a

dirty word in our business

um but in some some places and some

times

taking on a little bit of debt to help

the business

kind of buy you out and give you some

some money to go live off of

and then pay that debt back over time

through profits that is something that

a lot of folks have had some success

with doing when those debt levels are

not too high right you have to make sure

you’re being smart about it

but does provide a way to create some

additional cash flow additional

liquidity for you to make that

transition

now what about the key employees that

people are concerned i want to keep

these key people that have helped me

build the business

employed and maybe now this person

in this company who’s selling they’re

not going to be around it’s a complete

buyout

how do they set those people up for

success yeah i mean i think this is a

this is a great question

and one that i always go back to

thinking about myself

of how do you choose the right partner

to ensure that they’re going to kind of

continue

the livelihood and the business that is

being built and run

by your employees because i think in

some respects employees

are your second family and so this goes

back to the question of you know who do

you want to select

from you know the the many different

financial partners

that are available to you and how do you

select the right partner

that is going to kind of build on your

legacy

rather than kind of build against your

legacy and so it’s a little bit of

ensuring that you have

wastewater people running the business

that you introduce them

to your employees at the right time kind

of get buy-in from the team

and ensure that even during kind of

after the sale

maybe there is kind of a several week or

several month transition process for you

to get the new owners up to speed on how

to run the business

and get the employees on board with

these are the right people to kind of

lead the next

the next phase of my company michael

when is the right time to get these key

employees

involved so they know that you are

preparing to sell

i think it depends a little bit on on

your relationship with your employees

i tend to be a pretty transparent guy

like to keep people in the loop not like

to necessarily surprise

folks that this is coming down the road

but i also understand there’s a little

bit of sensitivity

or a lot of sensitivity related to this

topic

and so i think it again it depends a

little bit on the owner

and his or her relationship with those

employees

we’ve had you know the conversations

that um that that i’ve had

a lot of owners are you know with uh you

know 10 15 employees

just kind of tell everybody hey i’m 65

i’m looking to start transitioning out

just so you know you might see some

folks coming around

kicking the tires on a you know monthly

basis just to see

who that ideal partner is and that works

well for some people

i think on the other side there’s always

the the concern from owners

that employees will leave if they see

the business being transitioned to

somebody else

or just kind of inherently skeptical and

so i think

i wish i had an answer for you trace but

i think it’s going to depend a lot on

kind of the company culture and the

owner’s relationships with employees for

when they think is the right time to to

tell folks that this something that they

are thinking about

now as people are planning for this

obviously the

further out the more organized and the

more time that they have

but how would their to-do list change

from let’s say somebody who has 10 years

that they’re looking to transition to i

need to get out tomorrow

you know i i always like to think about

this transition period in kind of a

10-year five-year and one-year process

and really getting owners ready for that

sales process

is a is a progression and i think one of

the things that that i always come back

kind of more from my my operational days

thinking through the both the financial

and the operational decisions that need

to be made

in order to have that successful sales

process

i think some owners because it’s hard to

do both

choose one or the other but when you’re

thinking about the financials right

it’s getting getting your books in order

getting your numbers in order

and it’s also about when you’re thinking

about a financial partner

getting the right cultural fit you know

all these owners out there have probably

talked to various investors that talk

about this

due diligence process right and due

diligence is when you’re thinking

through like

what does the accounting look like what

do your customer contracts look like how

do you make

business and i think something like that

gets short thrift every once in a while

is are you a good cultural fit with my

business are you going to be able to

kind of fit yourself seamlessly into

the operations of this company and grow

it over time with respect to

you know how we’ve been running for the

past three decades that’s more on the

financial side

on the operational side owners typically

are

the best water treaters the best sales

people

and the best kind of customer service

individuals at a company

and while that’s great it also kind of

lends itself to

a potential situation when that owner

departs who is going to take on that

sales

service and customer relationship piece

and so

you know as i think about it you know 10

years from retirement start

promoting employees into management

positions right

managing a business and a team is very

different

than running service on a cooling tower

it’s it’s a different half of your brain

it’s a different skill set

and begin ensuring that you’re just

doing knowledge transfer whether it’s

with

sales or treatment or chemicals to those

employees

i also think you know we are in an

industry that

has a lot of ambitious growth plan

and so when you’re 55 you’re 60 and

you’re thinking about retirement 10

years down the road

i think owners also need to think about

what is the type of business

that i want to pass along to this

investor

to this this next owner and the reason

being

is 10 years from now you know you have

to decide about what are my growth plans

you know am i going to expand

regions am i going to expand

technologies because you need to

understand the risk reward profile

for making that expansion as you think

about who that next owner will be

in a decade five years from the sale

i think beginning to more actively

transition sales and and

vendor relationships to other employees

just to try and minimize that risk of

of certain items being lost in the

shuffle getting your numbers

in order and i think really five years

for a sale is when you should start

maybe answering more of those emails

trace or having more phone calls

with the folks that are reaching out to

you in order to kind of

do start doing your own diligence on who

is the right capital partner for me

within that within that five year bucket

as well an investor

typically it’s always different but

investor typically will look at the

three years of of your financials so

that

making sure that as you think about

selling five years down the road

really the three years prior to is an

especially

important piece and nowadays investors

are looking

to see you know how coveted proof is

your business is this something that

uh had a big drop off in march april may

or just something that was truly

resilient

and then one year uh you know now you

know you’ve spent nine years kind of

getting ready for this

while also running your business right

so you should have everything basically

in order

but a year from sale is really when you

need to to start reaching back out and

finding

those that right capital partner just

for the owners on on the on the

from on the podcast a typical sales

process

even when you’re ready to go is a six to

nine month process

right there there’s there’s three months

of talking to people

getting bids getting letters of intent

and then you know maybe even six months

and then once you get that letter of

intent once you kind of sign and say you

know i’m gonna bind myself to this

valuation this is interesting to me

then the owner or the new owner or the

new investor will likely want to spend

initial

two to three months really diving into

the business doing kind of a thorough

review of your financials

and your accounting and your legal

before they can truly kind of

send you a check and so just as a

reminder this is not a

next day process and opportunity but i

i think for both parties both for

yourselves and for the new investors

thinking about this as a six to nine

month process is really important

you’ve done a great job setting up the

logistics telling us about the process

do you mind telling us

a narrative about how you’ve experienced

this through one of your customers

yeah absolutely we come at this again as

kind of water and wastewater people

and so as we talk to our potential

acquisitions

you know we tend to really harp on this

concept of being water people right so

our our initial calls whether it’s a 30

minute call

45 60 minute call i’d say 95

of it is just talking water talking the

industry trying to

both get a feel for you know is this

owner looking to sell now are they just

dipping their toe in the water are they

looking to

find the right capital partner 10 years

down the road and from our perspective

i think we’re trying to show how we view

kind of the future of sylmar

as being something where we have no

desire to

you know cut employee relationships or

we have no desire

to load up companies with debt and sell

them in five years our goal is to run

healthy businesses over the course of of

decades

and so that kind of leads me to you know

how is it

like working with a third party as a

capital provider

and i think it goes back to it’s very

dependent on the type of partner you

choose right there’s like i said private

equity there’s the strategics

there’s operating partners like myself

there’s kind of the seller financing

path and your process will be very

different

across both the size of your company but

also who you choose

as a capital partner you know what i

always recommend

is there’s there’s informal processes

where you know owners just run this

themselves and then there’s formal

processes where

you always hear about investment brokers

that are kind of going and running up

a process where they’re going to bring

you a bunch of different buyers and take

on different bids

i think that’s that’s great for some of

the larger companies i mean you’ve

probably heard of some of those

companies doing that in the past

i i think candidly and honestly for the

smaller companies

you know going out and running more of

an informal process where you respond to

some of those emails or you reach out

to maybe some of the investors that that

your friends in the water treatment

space

have taken investment from in the past

and reaching out to them

is really important and so

you know how do you get started first of

all just make sure

your business is in a good place right

make sure that your accounting and your

numbers is in order

make sure that your customers are happy

if there’s any extensions

coming up on service contracts make sure

that those are in order before you start

thinking about

selling and then you know a typical

process

so i i thrown a lot around a lot of

different dates and time frames and it’s

probably a little bit confusing in some

respects but

if you think about what is the process

that i need to take

in order to get to a final signed

agreement

it’s have your initial conversations

going to get a feel for

who these investors are sign an nda i

guess i’ll repeat that sign an nda

before you start

sending sensitive information once you

sign the nda

you’ll probably get an initial list of

questions

from your investor or from the from the

folks that you’re talking to that

that range from like show me how much

revenue you have show me some customer

contracts

if you have any intellectual property or

you’re kind of having licenses for

technology they’ll probably want to see

those

and then once that happens they’ll

likely will be a document submitted

basically like an indication of interest

and this is what investors just said

it’s like a fancy term for basically

saying i’m going to send you a document

that says

based on all the information i have

today this is

what i think is a range of valuations

for your business

right so you can go lower it can go

higher just based on

once they do their more full deep dive

into into your document

once that happens if you choose to move

forward after that point right if you

think you’re getting a fair

a fair shake and a fair price then

people will these investors likely will

come

to your to your office have what are

called management meetings basically you

know

kicking the tires talking to employees

if that’s something you’re comfortable

with

getting a better feel for you know what

is the actual space and making sure

frankly it’s a

it’s a real business a real company and

then after that

you get your letter of intent which

provides basically a you know this is

the number

i as an investor i’m willing to pay for

this business

and if that is something that you’re

comfortable with i think is a fair shake

then there’s uh you know you sign that

and essentially have 60 to 90 days

with that investor to have exclusivity

to do kind of a more thorough

legal financial accounting uh due

diligence process

before the final agreement and check is

signed

so that that is a i’ll say a rough

process right

every every diligence process is going

to be a little bit different but as you

are thinking as an owner about

what are the steps that i need to take

uh i think that’s a good summation

for uh for your reference in the back

your head i can’t help but thinking

there’s probably some service

technicians listening to this episode

and this can make them nervous

what can we say to them so they can feel

more powered in this situation

first and foremost you’re not alone this

industry

is chock full of people who came up

in the water space in the 70s and 80s

and i think everyone right now is trying

to figure out not if they

should retire but how and so in many

cases you know these businesses

have been your you know your your second

marriage or your baby your legacy for

the past several decades

and you’re looking for someone that is

going to be a good partner

that i think kind of needs to check off

three boxes right you want someone

that’s not going to run your business in

the ground

you want someone that’s going to respect

your customers and you want someone

that’s going to

grow the business the message that i put

forward is

it’s a hard process to find that right

partner but it shouldn’t be scary

because i think it always comes back to

you don’t have to make a decision

you don’t want to make and if you don’t

think that this is the right financial

partner

you should walk away and you should

continue looking or take a step back and

reassess how you want to find that

partner

and frankly i think there are enough

folks in the water treatment space

that have been through this process that

you’ve run into an

awt conference in the past that can

probably give you some really good

advice i mean

frankly you’re all welcome to reach out

to me for just some uh

you know hopefully unbiased advice as

well but i think

the key takeaway is you don’t have to do

anything you want to do find the right

partner spend the right time

and that will lead you to the best

result do you ever think we’ll see

a water treatment company being pitched

on shark tank

i’ve been waiting for it i i i think

mark cuban would be an excellent partner

i agree but i’m not so sure if someone

wants to find out more information about

you

where should they go first go to my

website

www.sylmargrp.com

for silmar group it’s s’s and sam y l

amazon michael a r

so feel free to to go to my website my

email address and my partner’s

email address is there feel free to

reach out at any time i’ll make sure to

have that on my show notes page

great information on today’s episode i

do have a few

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