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HVAC-ology
Welcome to "HVAC-ology," your podcast for all things related to commercial HVAC systems! Whether you're an experienced technician, an HVAC engineer, a curious business owner, or simply someone interested in understanding the parts and pieces of HVAC systems, this podcast is perfect for you.
In each episode, our expert hosts and enthusiasts delve into the complex world of commercial heating, ventilation, and air conditioning (HVAC). We cover everything from the latest equipment technology advancements to practical tips.
Music credits: "Bring Me Back" by Deleveled (instrumental for intro and with lyrics for outtro).
HVAC-ology
HVAC-ology Episode 7: Benefits of ESOPs, Private Equity's Impact on HVAC and Other Insights
Ever wondered how a Harvard football player became a CEO in the HVAC industry? Join us in this episode of HVACology as we chat with Jim Bingham, the dynamic CEO of Hoffman & Hoffman. We kick things off with some light-hearted banter about Ryan's and Kelly's college theater days. Jim takes us on a fascinating journey through his eclectic career path, from his days at Harvard and Duke Law School to his unexpected stint as a middle school math teacher.
He dives into the world of Employee Stock Ownership Plans (ESOPs), explaining how they work and why they’re a game-changer for business succession. Jim’s insights are invaluable for anyone considering the future of their business, highlighting the benefits and challenges of ESOPs with a sprinkle of his personal anecdotes and practical wisdom.
We also explore the impact of private equity in the HVAC industry and discuss the future trends that are shaping the landscape. From technological advancements to the increasing demand for better indoor air quality, Jim shares his predictions with a touch of humor and nostalgia. We wrap up with a heartfelt discussion on the importance of enduring relationships and the personal memories that make our journeys worthwhile. Tune in for an episode filled with industry insights, personal stories, and a reminder of what truly matters in business and life.
Please be sure to subscribe to our podcast and share with anyone who might be interested!
Welcome to the HVACology experience, where we talk about all things HVAC industry, topics that are so hot.
Speaker 2:They are cool. Welcome to HVACology, episode number seven. Hello, kelly Patterson.
Speaker 1:Hello Ryan Hudson.
Speaker 2:How are you on this beautiful Friday?
Speaker 1:I am fantastic. I want to know how you are.
Speaker 2:I'm doing wonderful. Thank you so much for asking. I see that you have some friends in the background today of your camera.
Speaker 1:I do. I have puppies. I have three dogs at my house.
Speaker 2:Nice. So are you about to trek to somewhere in the world?
Speaker 1:I am getting ready. I have the day off today and I am going to Abingdon, Virginia, to visit my college roommate and her my youngest goddaughter.
Speaker 2:Cool, and what are y'all going to do while you're there?
Speaker 1:My youngest goddaughter is playing Ariel in the Little Mermaid. She has wanted to do that since she was six years old. We have a picture of her in an Ariel costume when she was six. So my whole thing with her is that if you work really hard, your dreams can come true. Dreams do come true.
Speaker 2:Yes, they are Dreams. Do come true, yes they are. That's right. So were you a thespian at one point in your life?
Speaker 1:I've always loved the theater and, yes, off and on, I still dabble a little bit.
Speaker 2:Okay.
Speaker 1:Yeah, I do community theater every now and again, but not right now. What was your favorite role. In college I played in the. There was a dinner theater, a medieval dinner theater, and I don't even remember the role, the name of the role, but I was this queen and I was evil and it was the best experience because I would. There was one point cause, there was an audience interaction, kind of thing, right, and at one point I came in and as I come into the stage and I'm like whipping onto the stage cause I'm mad at somebody.
Speaker 1:I came in and as I come into the stage and I'm like whipping onto the stage cause I'm mad at somebody, right, and as I come into the stage this whole table stands up and they start booing me and I take my finger and I'm like silence. And then they were like yeah so fun.
Speaker 2:That's funny. Did you know that I was also a thespian?
Speaker 1:I am not surprised, Ryan Hudson. You do all the things. Tell me about it.
Speaker 2:All right. So I went to go get extra credit for college and I was in theater 101, right, I'm a physics major and I go to audition. And guess what happened when I auditioned? You got the role. I didn't get just the role, I got the lead role.
Speaker 1:What.
Speaker 2:Guess what I am not. Guess what I'm not talented at memorization.
Speaker 1:Really. I'm surprised by that.
Speaker 2:Yep, Yep, Yep, Yep. I have to reinvent the wheel every single time I look at a job. It's, it's the craziest thing. I can't my my my memory is. Memory is terrible. Ask Dan Epperson sometime. I will so I actually had to ad lib almost an entire script because I remembered my first line and remembered my last line and I kind of ad libbed through it. All the other actors loved that I did that.
Speaker 1:Usually they hate that.
Speaker 2:Yeah, because they miss their cues.
Speaker 4:Okay, okay.
Speaker 1:I was like usually that's not good. Yeah, yeah, yeah, but I have another question for you, ryan Hudson, before we start. Yes ma'am A, you've got this funny looking thing, this little animal, on the back of your couch. What's that all about?
Speaker 2:That is a bless buck. That is an animal that I saw while I was in South Africa.
Speaker 1:A real live animal called a bless buck.
Speaker 2:Yes, they're actually called bless bucks, for two reasons. One, they actually get a fly that lands on their nose and actually lays eggs. This is disgusting and it goes into their nose and it causes them to sneeze. So what do you say when someone sneezes? Bless you Bless you. That's correct. So, and not just that, but when they do that, their heads always bow while they're walking, and so the people local people call them bless bucks.
Speaker 1:That's so cool, I love that you brought one home.
Speaker 2:Yeah, yeah, yeah, yeah. Yeah, my son actually did that.
Speaker 1:That's amazing. I have another question for you.
Speaker 2:Yes, ma'am.
Speaker 1:Why are you wearing that Hawaiian shirt?
Speaker 2:I am wearing this Hawaiian shirt today because today we are going to be talking about ESOPs with Mr Jim Bingham, and this is our ESOP shirt. I don't know if you can see, but it has all the different companies logos on the shirt, and so your team, kelly Patterson, designed this shirt and sent it out to all the folks so that we could celebrate being a part of an ESOP.
Speaker 1:I love it, I love the shirt and I love our ESOP I do as well.
Speaker 2:So today we have Mr Jim Bingham, CEO of Hoffman Hoffman. Welcome, Jim.
Speaker 3:Hey, thank you, Ryan. It's good to be here with y'all. I've enjoyed following your show. I understand there's a real entertainment world buzz that you're the next Ryan and Kelly, right? I think I don't know who it is now. I think it's still Kelly and somebody else, oh yeah, there was a show there's a show I forgot about that. Yeah.
Speaker 2:Yeah, regis, regis, and Kelly it used to be Regis and Kelly.
Speaker 1:Used to be Regis and Kelly, yes, but then it was Ryan and Kelly, wasn't it? Then it was Ryan and Kelly, and now somebody else.
Speaker 3:It's been a long time since I've been home during the day to be able to watch a show like that.
Speaker 1:You don't watch that in your office?
Speaker 3:I don't, I don't, weird, I'm sure it's a good show.
Speaker 2:Oh man.
Speaker 2:So, Jim, I was very excited to be able to talk to you today.
Speaker 2:My hope is is that we get to just give you a quick background about you know where you came from to get to where you're at today.
Speaker 2:And then my hope is is that we get to hear a bit about what in the world is Hoffman.
Speaker 2:Hope is is that we get to hear a bit about what in the world is Hoffman and then maybe dive into some of the things that you get to see really from your position, maybe kind of pull you away from just Hoffman and Hoffman and really just talk about your role in general for other folks that kind of have a similar role as you as far as what it's like buying a business, merging a business in kind of the mental exercises you have to go through to make sure that you guys are going to be happily married as two different businesses.
Speaker 2:And then also I want to go into private equity groups, because that has really been I nerd out a lot about a lot of different things, and one of the things that I've been looking into as far as the business world itself is private equity groups have really kind of grown and kind of. They've transitioned a lot as far as what they look like in the industry. They've transitioned a lot as far as what they look like in the industry and we'd just like to get your take on that and then maybe kind of end with kind of ESOP and where you think the business is going to go, sound good.
Speaker 3:Sure, let's do it.
Speaker 2:All right, great. So very first question how in the world did you get to your position today from high school? So take us kind of, you graduated high school. You had the whole world figured out, I'm sure, and then kind of take me through to where you're at today.
Speaker 3:Okay, Well, I grew up in Lexington, North Carolina, and went to Lexington Senior High School. I'm a proud Yellow Jacket and I played football at Lexington.
Speaker 1:What position?
Speaker 3:I was a tight end Okay.
Speaker 2:I was also a tight end.
Speaker 3:Yes, that's right.
Speaker 3:I remember that. So I went. I did study while I was in high school too. That's part of my story. I went to Harvard to play football and I hurt my neck, actually a month or two into the season, and so that ended my football career. But there was plenty of other things to focus my attention on at Harvard, and studying and classes and meeting interesting people filled a lot of that void. And after graduating Harvard, while in Harvard I got into Duke Law School, decided to continue my education at Duke. I needed a year off, so I took a year deferment and came back to Lexington and coached football and taught middle school math for a year.
Speaker 1:Oh Fun, I didn't know that.
Speaker 3:Yes, now I probably needed a year off from teaching honestly after that, but I went on to Duke Law School and graduated from there in 2000. And from there I had a more traditional legal career path. I worked for a federal judge for a year, was a clerk great experience as a lawyer. And then I went to work for a law firm, a law firm called Robinson, bradshaw and Henson, headquartered in Charlotte, north Carolina. Great law firm literally wrote the book in North Carolina about corporate law and I worked there for I guess it was four years and it was a great experience for me. That firm.
Speaker 3:In your first year of practice they move you through every practice group and so I was able to do litigation work, corporate law, real estate law, some trust in estates. I did employment law. I did a lot of work on just general contract disputes and did some construction law too. So that gave me a good sort of taste of all those different practices. I became a litigator while I was there and honestly I found the practice of law challenging, intellectually stimulating. I respect those that can do it well, but it wasn't for me.
Speaker 3:I've always sort of been had more of an entrepreneurial perspective and just my personality as a litigator, you're plugged into someone's fight, right, there's a disagreement, to the point that their lawsuits being filed, are about to be filed, and you're having to work through that and that work just didn't really appeal to me. I'd find myself in a conference room representing a client and I wished I was sitting in the client's seat. Heavy equipment rental and sales company and I did that and I was in-house counsel there for a year and my role quickly evolved to being as much or more business than legal and I became the CEO there of that company and did that for I guess six more years. I came to Hoffman. Hoffman a similar path Started off as GC, but I think I and the owner at the time had aspirations for me to do more and fortunately that evolved, became the COO and my responsibilities increased and then three and a half years ago became the CEO. So all that path was just so I could get to sell HVAC equipment someday.
Speaker 2:That's funny. You know the playing tight end. One of the things that I learned was is they say oh, you're taller than six foot and you can run faster than five seconds on the 40 yard dash and you can kind of catch. Let's put you at tight end.
Speaker 3:Yeah, that's. That's kind of you're right about that in some ways. But tight end is the great, is the great position, right, if you like to block, and I like to block, right, you're in the trenches You're knocking around down there, but you also get the occasional glory, the catch in the past. You know that's the best.
Speaker 1:But I assure you both the only person that remembers my football career is my mother.
Speaker 3:But, you know all in that story right. Football, practicing law, going to Harvard teaching school for a year, coaching right.
Speaker 2:That all has certainly been big influences in my life and shaped me to who I am today and influenced the way I'm a CEO about talking with you today, jim, is not just your role, but you have this weird thing called common sense that I've found every time I've talked with you, and so I've really appreciated that. I think that's going to be helpful for our business going forward, and I think that's helpful for your role.
Speaker 3:I think that's the Davidson County in me right.
Speaker 2:So tell me, if you were to run into Susie the soccer mom in the grocery store and she asked you Jim, I hear you're running this little business, hoffman. What in the world is it? How would you answer Susie the soccer mom? As far as what in the world is Hoffman?
Speaker 3:First I'd say we're about really big mugs.
Speaker 2:Hoffman. First I'd say we're about really big mugs. For those of you listening, he just took a sip out of a giant, gigantic mug Bigger than his head.
Speaker 3:Bigger than his head. Yes, no, we do all things commercial HVAC, and by that we sell commercial HVAC equipment and we represent over 80 different manufacturers. And by all things I mean from grills and grates and louvers and dampers and ducts and air handling units and outdoor air units, chillers, boilers, pumps, pumps, electric drives. I mean it is across the board. If it's, if you need it, we sell it. Uh, that's, that's part of our business and we have two companies that do that. We also have a uh hpac controls business. These, uh, you sell all that equipment and lots of different manufacturers.
Speaker 3:Think about a big data center, know, buildings the size of football fields times two, three, four. You have all this equipment. You've got to be able to integrate it so that it can be controlled right and it's not just the thermostat on the wall. There's a lot of programming that goes into that and it needs to be centrally dashed so that a facilities manager can pay attention to not just temperature, airflow, humidity, and that's what goes into sort of HVAC controls. It's very complex and we have a lot of engineers and programmers and very smart people working in that.
Speaker 3:And then we have our service business and that ranges in the complexity of work that the service business does, but it might just be. The school calls the HVAC is not working, and that's that's something we want to do get out there and help fix their issue. We sell preventative maintenance agreements, we do repairs and maintenance work and some some smaller scale project work, and so so that that's really it. I mean, ideally we try to circle the customer for all needs HVAC right, we'll sell you the equipment, we'll implement your controls and we'll service your system going forward.
Speaker 2:I think to be a good partner to your customer, I almost feel like you have to have all of those different businesses, because you know a customer, a lot of times they're, they're not. You know, they care about the air conditioning, right, they want to be cool, or if they have a process, they want to make sure that the process is running correctly, but they don't want to get into the nuts and bolts of it. They they've. Today's world is a is a world where they want to grab that person and they want them to be the solution for that. And I think that that's the reason why you you have to bolt on a controls company and that's the reason why you have to bolt on a service business to be able to be the startup warranty for the pieces, those 80 plus lines that you know Hoffman offers, and so it's, it's it's kind of a natural progression.
Speaker 3:I think you're right and it's all about serving the customer. And if we can be the easy button for the customer and if we're hiring the best people, who are bringing value, who are working hard, who share the customer's sense of urgency, then we will be the easy button and selfishly right. If we are being all things to the customer, there's a real stickiness to the relationship and our service. People are out there doing good work. A piece of equipment needs to be replaced. Well, we can replace it and we'll bring in our other company to help with that. Yeah.
Speaker 2:And I think maybe to add to that, the customer that is Hoffman is the mechanical contractor, so the service arm can come alongside them and help them with startup and then making sure that the right piece of equipment is selected and make sure that that equipment has the right brains behind it. Or the customer might end up being an end user that there's just a long standing relationship with and that we can work with the local mechanical contractor, we can work with the controls folks, and I think that's something that has been a delicate balance that I feel like Hoffman has done a very good job of.
Speaker 3:I agree.
Speaker 2:Yeah, so, um, all right, so we've explained it now to Susie, the soccer mom and if we could transition just a little bit, um, so, jim, I don't. We, you know we talked about this beforehand but we haven't really told the listener that the hope is is that this is part two of a two part series. Uh, we talked last week with Dan DiAlperto about kind of that $1 million-ish business to that $20 million-ish business, and now my hope is that we start talking about kind of bigger deals, not going from selling from one individual to the other, but what's it look like from a business to business, you know, so you've grown this business and you have the desire to sell this business, like, kind of walk me through, because you've walked through mergers, you've walked through all kinds of purchases and whatnot. So kind of walk me through, through, what's it look like? What are you looking for when you're trying to make sure that two companies can marry well?
Speaker 3:yeah, um, it's a good question and and there are a lot, a lot of, uh, a lot of options there, um, and and if you're selling your business, if your goal is just to your, for your ship to come in as much as you can get, you've, you've built something. You've, you deserve it. You know, let's take the money off the table and you're not really worried about day two, right, meaning after the sale. What happens to the company after that fact? Um, you know, then you're, you know your choices. Your choices may be different, um, but I would say this I mean, if you're concerned about your legacy or, for example, if you're going to continue on in the business or the people that you really care about will continue on in the business, I think making sure there's a cultural fit should be at the top of your list.
Speaker 3:What do I mean by that? That should be at the top of your list? What do I mean by that? You know, pay attention to their core values. The company that you're going into business with, say, the company that's buying you. Do those core values align? And that's hard to determine because you know everyone has these core value statements and they all, frankly, they look alike. Right, it's a lot of the same stuff and they all, frankly, they look alike. Right, it's a lot of the same stuff. But you know how to get at not just what they say but what they do and you know a couple of thoughts on that.
Speaker 3:If I'm being approached thinking about selling to another company, there's probably a good chance they've bought other companies in the past. I would ask to speak to the principles of those other companies that have been purchased and you can probably get a good feel from that conversation. You know how it went. Did they do what they say they would do? I think is really what you're getting at and although lots of times those folks are still working for the companies, so they probably don't want to disparage, I think you can read between the lines and get a feel for tone and other things.
Speaker 3:Another thought I had on this is lots of companies do pulse surveys, anonymous surveys of employees to sort of get a feel for what's employee well-being, what's the state of well-being. And if I was talking to somebody to acquire my company, I'd want to say, hey, have you done one of those surveys? And I'd like to see it. I think that would be a real good inside look. We have bought four or five companies in the last three years and I shared that survey with a prospect in the last two weeks.
Speaker 3:I mean it's very favorable for us. Obviously I want to share it because people like working for Hoffman. But I think that kind of concept gives you a little peek behind the curtain and I think otherwise, if you're in the position of selling your business, you're talking with the principles of the acquirer. I think you can get a feel for who these people are. Are they pressing to the point that you question their honesty? Just, you have an instinct about that and I think those kind of signals can come clear and kind of register in your gut somehow in the process.
Speaker 2:I think maybe, to say it in maybe a simpler way, jim is to. I think you need to be curious, and if you're curious about who they are, I think that's going to naturally bring up the questions that you need to ask of is this the right fit? Is this who I want to give my baby, to sell my baby to?
Speaker 3:I think you're right. I would also say people, particularly in this kind of conversation. I want to sell my business and I want to be paid well for it and I won't. You know, it's kind of like you use the you've used the marriage analogy there it's like you, I want them to like me, I want to like them, but at the same time even though it might feel a little unnatural ask the harder, more confrontational questions.
Speaker 3:I would advise you to get out front. What's this going to look like? Let's say, we got this done. Who's in charge? After this is over? What are you going to do to my business? What's my role going to be? Who would I report to? What's going to happen to my people? I've got an accounting group. You've got an accounting group. Is there redundancy? Do you plan to lay people off? These are harder questions to get into, but it's very important because you don't want to see your legacy destroyed and you care about these people typically and you want to make sure that three months into this thing, they're not going to be disgruntled and it's just not the place anymore that you want to be associated with.
Speaker 2:Yeah, and I think a part of the conversation Jim correct me if I'm wrong is that you can have the conversation of hey, I want to maintain what my name is in this local market and that way my customer doesn't see anything different, and I think you can have those conversations. I think you can also have the conversation of just completely rebranding as well.
Speaker 3:Yes, yes, and in those five businesses I mentioned that we've purchased, we did maintain the existing name in one of those businesses, and the reason was that business was just so entrenched reputationally and with great relationships, and we really were. You know, we didn't want to. We weren't going to make any changes to staff, we wanted to keep them doing what they're doing and the way they're doing it, and it just made sense to keep that name in place. I think, though, the default is to change the name, and I think that's a good thing too. Right, you know, you're being acquired by this new company.
Speaker 3:That company wants to sort of bring about its corporate reputation, its culture. It's a new day, and I think that's a statement of it's a new day. Not necessarily what was before was bad, but it's a new day, and I think that's a statement of it's a new day. Not necessarily what was before was bad, but it's a new day, and you don't want this team that's now part of your organization to feel different or isolated from the rest of the company. Right, that's a challenge too, and by having the same name and being part of the same organization, that helps make the transition. You know, work better too, and so that's the other side of the name change.
Speaker 1:Is it possible? I just have one real quick question about the alignment of those values, jim. Is it possible, if the values don't quite align and you can still do a good merger?
Speaker 3:Yeah, that's a great question, Kelly. And sometimes the economic, the business opportunity is so great. Let's say, you pick up a market or you pick up equipment to sell or products or something, or it just fills a void in your organization. Say, the company you're buying has some exclusive rights to that or intellectual property around that. You need it right, and maybe the culture isn't exactly the right fit or maybe there's some other things, but you still need to do that for your business. In that case, I think you very quickly double down on the integration component, right. Maybe you put some people in place there as leaders who envelop your culture and your core values and you know you build it from there. You do work to get people out of that some old mindset that you know really wasn't constructive for the future. It doesn't fit with yours. Rather, and that's through you know your company community events right, just bring this is who we are, these are our core values. You teach that, you preach that and I think over time there can be assimilation that works.
Speaker 2:So what we're talking about in this episode versus the first episode is the first episode is really revolving an individual, maybe, or maybe a couple of individuals, buying a company, and today we're talking more so about businesses selling to other businesses. But let's just say you have gone and you have exhausted, jim, all the curious questions that we've been talking about so far, and you just can't find anybody that you feel like is equally yoked with you and your values. And so there's this thing out there called an ESOP, and you've heard about it from maybe other presidents, other CEOs, and you want to look into that a little bit. Kind of walk me through, first off, what does the acronym ESOP stand for? And and kind of what is that? And and kind kind of the steps you would need to take to become that.
Speaker 3:Yes, yes, and let me start by reframing that.
Speaker 3:I like the way you put it, but an ESOP is not. Yeah, I've tried these other things and they're not for me, so an ESOP might be my last resort in a way that fits my needs. I would say an ESOP is an equal consideration among all things for the next stage your succession plan, and ESOP stands for Employee Stock Ownership Plan, and at 10,000 feet, this is what happens, and feet, this is what happens you sell your company to a trust. It's called an ESOP trust, and so they can be partial ESOP trusts, where you sell a portion of your company to an ESOP, or you could be like Hoffman, a 100% ESOP, so you sell all the shares of your company to an ESOP trust, and it's really about employee ownership. And in the ESOP world you talk about employees accumulating stock. Really just the ESOP, the trust rather owns the stock. Employees are actually become trust fund beneficiaries and they're allocated the value of stock in their account.
Speaker 3:I just want to make technically, that's what happens here, and so the way it works is if you want to create an ESOP, that's a way for you, as owner of your business, to get paid out for the value of your business. You are creating this trust and it's a legal process and you have sophisticated advisors involved, but you're creating this ESOP trust, and the trust pays you. What is the fair market value of your business? You can't pay more than fair market value, but you can pay the fair market value, and what typically happens and they come in all shapes and sizes, but what typically happens is in exchange for all the stock of the company sizes, but what typically happens is in exchange for all the stock of the company the ESOP gives the former owner a note saying we're going to pay you this much over this period of time, and, as the company moves forward, the company is going to use its balance sheet effectively to pay off the owner.
Speaker 3:And what the owner achieves, though, is they've taken this culture and this legacy that they've built, and I think the ESOPs really appeal to owners who are focused on their people and their culture, and they're able to preserve that because they're selling the organization to the employees, and the employees, in theory, can continue that great legacy going forward. That doesn't mean the owner has to be gone or that he can still be. The employees, in theory, can continue that great legacy going forward. That doesn't mean the owner has to be gone or that you know he can still be the president and still be the CEO and still be the chairman of the board and still run the company. But they've gotten paid for their shares and now you know the company is owned by the employees.
Speaker 2:So to make sure that we kind of exhaust the understanding of this. So the owner is actually going to be paid from the profits of the business. Is that correct? The money left over?
Speaker 3:That's typically how it works. It can come in different shapes and sizes, but I think that's the typical way they do it. And if I may add another explanation about how the ESOP works, going forward, once this has happened and the shares are in the ESOP trust, once this has happened and the shares are in the ESOP trust, what happens is, over time, as employees work for the company, they earn stock rights. Stock is allocated to their accounts and, in theory, the longer they work, the more stock they get. Not in theory. That happens in theory. Hopefully, the company is doing well and the stock.
Speaker 3:Every year the stock is appraised by a third party and that excuse me, value of those shares, hopefully is going up over time.
Speaker 3:So you think about you're getting more shares, stock value is going up and so you build this, this nice nest egg in the ESOP and it's like a retirement fund.
Speaker 3:And so when you work at a company, say for 20, 30 years, and then you decide to retire, what happens is you leave and you don't take the stock with you. You're paid out the value of that year's appraisal, the value in cash for your stock, and the money to pay that out comes from the company giving the money to the employees in the program and they pay you out and your shares then get divided between them on the pro rata basis, and so their accounts continue to grow and that's how the ESOP works. And so it's amazing because you can build all these ESOP millionaires in the trust and it really creates a culture of ownership and people are focused, I think, in a different way, about the business and about making the business better that happen with ESOPs, but I'm sure, just in your knowledge of things you've heard out in the world of, there are bad things that can happen with an ESOP.
Speaker 2:Walk me through maybe some examples of what are some times when it just doesn't work out.
Speaker 3:Yeah, yeah, I'm an ESOP fan, first of all, and everything I say, of course, is my opinion, and there are other opinions, and if you're listening to this, thinking about exploring an ESOP, you need to talk to a lawyer, you need to talk to your tax advisor or other things. But you know, I think one and I wouldn't say it's bad, but it is a reality. An ESOP is a retirement plan and this is a key point and we need to get this out there too. Once you become an ESOP, if you're 100% S-corp ESOP, your business stops paying federal taxes, federal income tax. Think about that.
Speaker 3:That's huge, everybody listening out there knows how much money that is.
Speaker 3:You stop paying federal income tax if you're 100 percent S-corp ESOP, and the reason is because both sides of the aisle in our government like ESOPs and they want to promote ESOPs and that's a tax incentive to do so, and so, as part of that, ESOPs are regulated by the IRS. It is a retirement plan, so the Department of Labor is highly involved. There are regulations and rules around ESOP that are a lot like your rules around your 401k, for example, in your business, and a lot of these rules are about just making sure that you're treating people fairly, You're not favoring one group of employees over the other, and there are rules as to how much money you can put into the accounts and other things like that, and so you need a third-party administrator, a TPA, to help manage it. You have to have a trustee for the trust. You can have that as somebody who works in your business. It can be what's called an internal trustee. We have an external and I would recommend that you have to get an appraisal done of the stock every year and it has to be a third party to appraise the stock. We have an audit done of our ESOP every year.
Speaker 3:There's a lot of other administrative burdens and costs in having an ESOP and you really need to be the kind of company to dot your I's and cross your T's, because there are a lot of moving parts to an ESOP, and so I'd say that administrative burden is maybe one of the you know good, bad and the ugly Maybe that's more the bad side of it. It's good and I think that the intentions are good and in the right place, but there's just something to do as a company to manage that. You know another another item you know when you hear about why some ESOPs fail, you know it's still a business, right, I mean it's. There's not going to be any money to put in people's accounts unless the business produces, and so I think some of those ESOP horror stories are more about their businesses just failed versus the ESOP fails.
Speaker 3:But there is this, I think, concern or intention that you have to have if you're running an ESOP, you have to be focused on what they call the repurchase obligation and that is, as those people's stocks accounts grow and their shares get more valuable over time and then they decide to leave, you need to be able to pay them out and you're not asking your employees to use their own money to pay them out.
Speaker 3:Company is funding those payouts and so you have to produce cash into the future and you have to think about what's that repurchase obligation going to look like 15, 5, whatever, 20 years from now? And you have to get a feel for that. And you have to think about what's that repurchase obligation going to look like 15, 5, whatever, 20 years from now, and you have to get a feel for that and you have to manage your business around that. So there is a little pressure on that. I mean, the worst thing you last place you want to be is oh my gosh, these people have worked here 30 years and they're ready to retire and we don't have the money to pay them out the value of their shares, and so I never want to be in that position.
Speaker 2:Yeah, it's a great point that you need to make sure that just another layer of why you need to make sure your cash position is in a good place.
Speaker 3:And since you're not paying federal income tax, you know you ought to be in a better position. Yeah.
Speaker 1:Put that in the bank.
Speaker 3:That's right, that's right.
Speaker 1:Jim, as an S-corp, is there a federal minimum that you have to pay employees each year into their accounts?
Speaker 3:There is not it. You know, it depends on how well the company does.
Speaker 1:OK.
Speaker 3:But you know this is what we say to our employees. You know people say you've heard the saying I'm working for the man. Well, guess what? In an ESOP company you are the man. But the other side of that is you've got to earn your success. If we produce, the money comes back to you in an ESOP, unlike a traditional company. But if we don't produce, there's not money coming back and the company is not required to send money back if it doesn't happen, right yeah.
Speaker 1:And that's in line with spending, too right? Do you think employees in an ESOP company spend less?
Speaker 3:Kelly, that's a great question. I do think they treat the company money more like their own. And here's an anecdote At some point we did a presentation to spouses also about what the ESOP means, and one spouse came up after the presentation and said you know, mike would take a business trip and he'd work for our controls business, and he would. He'd be on his computer on the weekend looking at hotels and he would, you know, he'd spend 20 minutes like looking at hotels and really vetting them and thinking about it. And this wife said I just told him Mike, the company's paying for it, just book the hotel, let's go, let's go to this picnic. And he was just thinking about the value. He was thinking about. Am I making a good esop decision here? And I mean that's and that's awesome, that's, that's what it's about. And so I do think it. It it takes on a different, different, you know, intention and environment when you're an ESOP.
Speaker 2:I actually annoy hotels because I will call the front desk to see if I get a better price.
Speaker 1:I do that too it's good. Or I'll use something like Hotwire and I'm like what's the best rate I can get? Can I get this hotel for under a hundred bucks?
Speaker 3:Yes, I think that's part of it, you know, I think to expand on that a little bit, I'd like to hope that we're holding each other more accountable as a result. I'd like to hope that it's not just about savings, it's about also efficiency. We had an employee come up with a good spreadsheet concept that combined a couple processes together that saved hours for someone in a given week and that's a real big ESOP contribution, right, I mean, it allows other people to do more, get in front of customers, serve our customers better, which it's ultimately all about. But I think the ESOP incentives align with serving the customers and being the best we can be.
Speaker 2:So I'm not looking necessarily, maybe for this next question for you to be the expert on it, but just maybe a quick opinion in your mind. So you have the option. Option one we've talked of a business selling to another business and we've kind of talked through a little bit of the pitfalls of that. We've talked about having another option of being able to sell the company to the employees, to become an ESOP, and then I think there's also this third option. We don't need to stay on here very long, but you also could go public too with your company as well. Is that right, jim?
Speaker 3:also could go public too with your company as well. Is that right, jim? Yeah, and honestly, ryan, my understanding of going public and what is the window as to its size of company and how and what makes sense when to go public, I'm not versed in that, but yes, that is an option. I think it's the cost and the considerations for going public make it more a large company game than a smaller company game. But you're right, that is an option.
Speaker 2:Yeah and yeah. So I think there's a lot of good options that you have and I think you nailed hit the nail on the head of. The first step that you need to take is just probably to find a good attorney and talk to about, hey, what are my options and what's the right road for me as you're thinking through this, I think that's right and there are some good advisors I mean the gentleman you had on in the last episode.
Speaker 3:I think is a kind of good place to start.
Speaker 2:Sure, yeah. So if I could transition a little bit, jim, from maybe talking about what it is that you can do as far as selling your business and what that looks like in the three roads we discussed the next kind of road I want to go down as private equity groups. I am fascinated about kind of what's happening in the in the world of business with private equity groups, kind of at a high level. What is a private equity group? What do they do, how, what are they, how do they get established? Just kind of a high level.
Speaker 3:Yeah well, you may know more about this than I do and please weigh in. But private equity groups they raise money to invest. They come in all shapes and sizes too, but many raise money to then invest and buy businesses. Their goal is typically to buy, improve businesses, roll up other businesses, make a bigger business and then sell that entity in a time frame three, five, seven years I think is probably the zone and they're selling to, I guess, potentially other businesses in the same field. But oftentimes you see them selling to other private equity firms who play at a bigger business level. Or you build it up, maybe to go public. That's also something that is happening, but they buy it to sell it, and so if you're someone thinking about selling your business, that certainly is a consideration.
Speaker 3:In my experience in the last few years in our industry, private equity firms are paying higher multiples. They're paying more for businesses than perhaps another in-industry business would, and so if you're looking to maximize your payout, that may be a good option. But you've got to understand if you're focused on that other side, the culture side, there could be a sacrifice and I'm not saying there's always a sacrifice, but there could be a sacrifice there, because you're selling to someone who is intending to maximize cash flow and has a short-term perspective, they want to sell that in three to seven years, so they're not playing the long game. And at some point in there it's about how much free cash am I producing today because I'm going to get paid more for it, and that's what they do for a living and I understand it. And so you know. You think about the future. Are they going to be able to pay the same commission plan they have now? Are they going to keep as many people employed as they have now? Are they going to start making short term financial decisions over long term? What's best for the company and for the people? These are the things you need to think about and when you care about your legacy after the sale, thinking about a private equity firm.
Speaker 3:Those are some considerations and, again, not all pegs are the same. I see some that seem to want to buy, for example, in the HVAC industry. They'll buy any rep they can that is available for sale. It kind of feels that way. And does that mean that those reps, their business models, how they go to market with products or otherwise, their cultures? Are they necessarily a fit to get to see how big I can get as quickly as I can get, so I can go to that next step, which is a sale or going public. And what does that really look like when you had this conglomerate of all kinds of different companies and there hasn't been careful attention to culture? And, as you gather from this conversation, I think a lot of culture and I think that has to be a careful decision. That has to be a careful decision.
Speaker 3:And so everybody has heard private equity firm horror stories and I think some probably work well and I understand the role they play in finance and it's interesting to me too, ryan but if I was an owner and I really cared about my people for the long run, I would be very scrutinizing if I was considering selling to private equity.
Speaker 2:Yeah, and so it seems like private equity groups are very interested in the trades businesses because we can our podcast is called HVACology, you know our podcast is called HVACology and so to stay kind of in that HVAC world, you know HVAC businesses can be, if they're ran well, can really be a cash cow for a private equity group, and so that's.
Speaker 2:I think that's the reason why they're willing to pay such a multiplier to be able to purchase them. But again, if you're talking culture, you don't know what you're going to get. And that's when it's harder to be kind of curious as far as what their plans are, because their plans are to maximize their ROI. And a private equity group is really, in my mind, kind of another vehicle, another arm for people who are looking to be able to maximize their dollar. They've invested in the S&P 500. They've done individual stocks and really what the private equity group allows is it's another vehicle to be able to purchase a hard physical company with real assets and to be able to maximize that and kind of sell it on to what we talked about earlier.
Speaker 3:And that's a good point. And if you're considering selling to a private equity firm, one thing to think about too is sometimes you see the structures, you're paid something up front, but then the rest of your purchase price comes over time. An earn out kind of arrangement where you produce certain whatever thresholds or certain things happen and you get the rest or you get more, but are you in control anymore, right? Who's running the business? Are you running the business at that point? Or is it the Wall Street guy who and I can say this with full hypocrisy who's, who's not an HVAC person, right? Um, and so I you know. These are things you have to think about.
Speaker 1:Jim, I would say you're an HVAC person at this point.
Speaker 3:Thank you, kelly. I appreciate that. I'll. Uh, I that's. That's the best compliment I've had in a long time. Thank you.
Speaker 2:Yeah, uh, so we. So we've dived into B2B purchases, we've dived into what it looks like to set up an ESOP. We'll talk very briefly about going public and then also private equity groups. One of the things I wanted to kind of close with Jim is uh, where do you see and and and? The reason why I'm particularly interested in your answers is because you get to see things kind of at a higher level.
Speaker 2:Uh, where do you see the HVAC business going in 10 years? And and, if you don't mind, let me preface a little bit uh, well, probably about 10 years ago I was sitting down with one of the executives, with my former employer, and one of the things that he said was is that they as a company did a bunch of research and they were a Fortune 40 company, they were a big, big business, and one of the things he said he did was is that they paid a lot of money in research on where is the HVAC business going? And what they found was and their research was is that really you're going to start seeing all of these smaller businesses being purchased and kind of merged in and you're going to see everything kind of coagulating a little bit. Everything's going to kind of get sticky and grow, and I think that's the reason why we're seeing the private equity groups kind of being a part of the conversation today, where maybe it really wasn't that big of a conversation 10 years ago.
Speaker 2:So he was just he sat down with me and he kind of went through where the HVAC industry is going to go, as far as all their research and I'll be if that's not exactly what is happening to our industry. You're seeing these small. It used to be that you would see a lot of mid-sized businesses and it seems like that is going away. And you really, you have your guys that are what we call in the industry a Chuck in a truck. Uh, you have the smaller businesses that are really a guy or maybe a guy or two guys or three guys, and then all of a sudden it seems like it jumps to these, these much larger businesses, and uh, I feel like that gap is is growing as time goes on. So, anyway, you might have a completely different answer than what kind of where my mind is going, but kind of, where do you see the HVAC industry going in the next 10 years?
Speaker 3:I do think there's going to be more consolidation. I think you're right in that instinct. Bigger doesn't mean better, though I guess is the other comment and there are pressure on smaller businesses to sell, to become part of those conglomerates because in theory, they have more bargaining power with manufacturers or what have you, I don't know. I think a lot of industries go through these cycles where there is that consolidation and then there's breakup of it, and I think that's sort of natural these days. I do think private equity's interest in rolling up HVAC companies is a good sign to what I think is the case, that that I'm bullish on the next 10 years. I've read articles that predict 5% to 7% compounded annual growth rate in our space for the next decade. In a place like the Southeast, where I live, companies are relocating here, expanding here. It's a great place to be and I expect us to even be better than national trends in terms of growth. You know, I think maybe on the more interesting side of the next 10 years, I think advancements in technology are going to be a big part of our industry. Systems are getting more and more efficient. You know there's regulation to make it that way, but I think, just from the competitive side. Manufacturers are focused on making better and better products. You have a building and the you know the largest expense of operating a building is the HVAC system and the extent we can make those systems more efficient. You know that saves the customer money and, in turn, right, we have a value. We're selling something that helps them, that helps them save costs and better product, and so I'm expecting us to take advantage of that. And, conversely, there's a lot of old, antiquated systems, frankly, that need to be upfitted, need to be replaced, and a company like us is there to help sell and bring that efficiency to older systems. So there's a lot of opportunity there. In another way, I think we'll see a trend on these smarter systems. With the Internet of Things and AI, I think systems will naturally become sort of more adaptable, customizable to a particular end user situation. They'll become smarter, more connected with your security systems. Audio visual what have you just becomes a smarter building in general, and I think HVAC will be front and center in that trend too.
Speaker 3:I think indoor air quality after COVID will continue to be important. We all became very dialed in to. You know how clean and pure is the air I'm breathing and you know the HVAC system and I know y'all have done a presentation on filtration, right. I think that is here to stay and people are going to continue to be very serious about having as clean air as possible and I, you know companies like us are really poised to, to serve, serve that space. You know, one concern I have for the next 10 years is are we, are we going to have skilled workers? Are there enough technicians to handle these sophisticated systems with maintenance, service, repair? It's really up to companies like us to train that skill. But also we need to invest in education in our community colleges, in our colleges in high school for that matter to teach our trade, because they're already hard to find those great techs and I think it's only going to get harder.
Speaker 2:Yeah, I think that there's a wave of change and the reason why is on a micro level.
Speaker 2:I went to my son's graduation my middle son graduated this year and I was surprised. There were multiple people that were going into the trades who were graduating. Went to my son's graduation my middle son graduated this year and I was surprised. There were multiple people that were going into the trades who were graduating, and I think that there's a real shift and I think that's just a function of economics, right, these? You know you can go and get $400,000, you know $200,000 in student loan debt and then go get a job to where you're making you know, fifty thousand dollars a year with that degree and then having to pay all that back plus the four years that you weren't able to earn an income. Or you can. You know there's a lot of businesses, including ourselves, to where we will help you out with paying for your school while you're working earning an income, and so these younger people are seeing that okay, so I don't need to get in debt and I can go and make money instantly and it's becoming a no-brainer for a lot of this next generation.
Speaker 3:That's right. And in addition to being well-paid, it's good, challenging work. That's right.
Speaker 3:And it's in addition to being well paid, it's good, challenging work. I liken those texts to doctors right, they're symptoms and they're trying to, you know, think through what could be causing this and they try different things to find their way of. Hey, here's a path for me that I don't have to spend a gazillion dollars to go to college. This is a good path that will reward me sooner and set me on a career path. And if you work for an ESOP, right, right, esop millionaire someday.
Speaker 2:That's right.
Speaker 3:Yeah.
Speaker 2:That's right, I love it. That's right, I love it.
Speaker 1:No-transcript Kelly did you learn something new today? You know what the big. So I learned always. I always learn something when we talk about this stuff, but the biggest, most interesting thing I learned is that Jim Bingham was a math teacher yeah, what?
Speaker 3:yeah, it's shocking because you probably had to ask me a math question and you realize I need to help In that gig. You just got to stay one day ahead of the kids, right? Just?
Speaker 1:one day ahead Right.
Speaker 2:That's right.
Speaker 1:Anyway, yeah, this was honestly one of my favorite conversations. I think we covered a lot of ground.
Speaker 3:That was interesting to a lot of people would be my guess. Well, I appreciate y'all having me on and thank you for all you do. It's a great podcast. I enjoy it every time.
Speaker 1:Thank you sir.
Speaker 2:Kelly, what should folks do if they enjoyed this today?
Speaker 1:If they enjoyed it, they should follow us, they should like, they should subscribe. We've got HVACology on LinkedIn now. We've got a YouTube channel. We've got Instagram. Please go to Spotify, go to Apple. Tell people you love us, like, subscribe, follow, do it all.
Speaker 2:Very good. Well, that ends episode number seven. Bye.
Speaker 4:Took a rocket past Saturn.
Speaker 4:Things don't seem to matter much to me anymore. Got lost inside a daydream. Get sick of all schemes they play on their machines. Lost so many words inside. Get sick of all schemes they play on their machines. I lost so many words as I got older. You would have thought I was a storm in a mind of love.
Speaker 4:I accidentally wrote these words down, thought all the best of me faded in an empty sea. But you always bring me back. It's your blue eyes, 20 years of staring at that freckle on your left shoulder. Who would have thought all I needed was to think of you to bring back the words inside? But you always bring me back. It's your blue eyes, twenty years of staring at that freckle on your left shoulder. Who would have thought all I needed Was to think of you to bring back the words inside of me? I drove an hour to see you.
Speaker 4:Things just seemed to matter more to me anyway. Got lost in reality. No answers to cancer. We never got to talk. Lost so many friends as I got older. Wish you had the strength to hold you a little bit longer. Always meant to write these words down, thought all the best of you faded in an endless sea, but you always bring me back into blue eyes. 20 years of staring at that, thank you, I don't know. Bye eyes. 20 years of staring at that brickle on your left shoulder. Who would have thought all I needed was to think of you to bring back the songs inside of me. You were always inside of me. You were always inside of me. You were always a part of me.
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