Royce Yudkoff:

Welcome to Think Big, Buy Small, a podcast from Harvard Business School about entrepreneurship through acquisition. We’re your hosts, Royce Yudkoff…

Rick Ruback:

…and Rick Ruback.

Royce Yudkoff:

Today Rick and I are going to be speaking with Jerod Pierce, who has an amazing story to tell. He started life without any of the advantages you'd hope for a young person to have, and he managed to climb his way through getting an education, getting some good jobs, and then deciding he wanted to control his own professional destiny and become an acquisition entrepreneur. It's an amazing story of going from misfortune to great fortune. And I think you'll not only find it instructive on how to be an entrepreneur through acquisition, but it's very inspiring.

Rick Ruback:

Royce, let's get to the conversation.

Royce Yudkoff:

Jerod, welcome. Rick and I are delighted to have you with us. Maybe a good place to start would be if you tell us a bit about your personal background, for instance, where you grew up, what your family was like, your own family now.

Jerod Pierce:

Sure. I was born in Seattle, Washington, but eventually made my way to Missoula, Montana. I was in foster care growing up. I had a very different life growing up than I do right now. Right now, married, two kids, doing relatively well, but as a kid growing up, I was in and out of foster homes, primarily in the Pacific Northwest and in Montana. Ultimately, was in a permanent foster home and ended up going to the University of Montana for a couple of years and then Seattle University for my undergraduate degree. I wasn't ever in, until the age of ten, one environment that was very stable. So, it was a lot of short-term environments. Both my parents have passed away, my biological parents passed away, but my mother was, she was addicted to drugs, so she'd get in trouble. She'd go to jail. I’d go to a foster home. And then she'd get out, she'd take me back. For me, it was just very inconsistent. So, I was actually held back in the second grade because I missed just so much school up until the age of ten. And then from there, that environment is much more similar to the environment that I have or that my kids have, you know, where it's stable, it's consistent, you eat breakfast before you go to school. You know, whereas before I wasn't even going to school.

Rick Ruback:

Well, what a transformation and a journey you've made in your life. Congratulations.

Jerod Pierce:

There have been a lot of people along the way that have helped me, so I have a lot of people that I owe thanks to.

Royce Yudkoff:

Jerod, you left us off where you went to university and that's for most people, it's kind of their first transition away from life at home to adulthood in a structured way. Take us a little bit through college and then a little bit about your life and career from then forward.

Jerod Pierce:

Yeah, so I first went to the University of Montana. I walked on, I played football. So, that's right in Missoula, which is where I had grown up. So, I ended up going there for two years. And my first year or two into college was difficult. I wasn't doing that well, transitioning for the first time, being out on my own. However, my biological dad had called me and said, “Hey, I have prostate cancer. I'd like to build a relationship with you.” So, after my second year at the University of Montana, I transferred to Seattle University. And I was actually accepted there on academic probation, which fast forward when I graduated, I graduated with honors. So, it was just like, “Hey, if you guys just get me in, I'm going to be focused and do what I need to do to be successful here.” So, when I got to Seattle U, I became much more involved with the school, joined the investment club, joined some other clubs and just became much more focused on academics and trying to get the most out of my undergraduate degree as possible. So, I switched from accounting to economics and finance. I ended up becoming the vice president of the investment club. And part of my role there was getting guest speakers to come speak to the club. So, it was like the best role that anybody could have because these were all, you know, potential folks that could hire me as a full-time job or as an intern.

Rick Ruback:

Tell us how you got interested in business.

Jerod Pierce:

Yeah, business, it was just one of those things that people would say, “Hey, you know, if you want to make good money when you grow up, get into business.” And given my background and how I grew up, I wanted to have a very different life than what I had in the first ten years of my life. So, came to business and then everybody would say, “Hey, you should get into investment banking. They work really hard, but they make a lot of money.” And I was like, “Well, I'm willing to work hard and I'd like to make a lot of money.” So, I ultimately got an internship with an investment bank in Seattle. And my internship started in the summer of 2007. So, you got to remember like the great recession is starting to happen. And so when school, when my final year came around, I never left. I said, “Hey guys, I'll keep interning here two days a week and I'll take classes three days a week.” And so I overloaded on certain days and then would go to the investment bank called D.A. Davidson for the other days. And so I interned during my senior year of school because I just didn't want to lose the opportunity. And fortunately, they ended up making me a full time offer upon graduation.

So then I went into investment banking and ended up being there for almost five years. And then about four years in, I kept running into this guy in the elevator, and I'm black, he was black. In Seattle there’s not a lot of black people doing investment banking. It's just a small network. We became friends and he had co-founded GenX 360, which was based out of New York and at the time was a $600 million industrial B2B private equity fund. And so he eventually was like, “Hey, you should think about coming to join GenX and do private equity.” And I had always been kind of interested in private equity. So ended up leaving investment banking, joining this private equity firm that was based out of New York, but I stayed in Seattle. While doing private equity, I obviously got to know other people within Gen X, and a couple of them had said, “Hey, you should consider going to business school and applying to go to Harvard.” And they really encouraged and pushed me to go to HBS. And so, studied, did the GMAT, applied, got in, went to HBS. And while I was there, I took your guys's classes. Post HBS, went back and did private equity for one more year at a different firm, at a smaller firm, a $50 million fund. And I was their first hire. It was two partners and me, so I was doing everything. One of the best learning experiences of my life but wasn't going to be a good fit for me. And I had always had this interest of pursuing a company to own and operate, from my time in the ETA courses. So, about a year after working at this private equity firm, this was in Boston, my wife was at Harvard Law, we weren't married at the time. Some point through this we ended up getting engaged. So, then I moved back to Seattle and did a self-funded search.

Royce Yudkoff:

Hey Jerod, I'd love for you to spend a moment more on this decision to become ultimately an entrepreneur through acquisition, because up until that point, you're developing what to most people is the makings of a really great career, doing interesting work, potentially making a lot of money, but you were interested in entrepreneurship. Can you give us a little more information on what it was about being an entrepreneur that made it more fascinating to you than working in someone else's company?

Jerod Pierce:

Yeah, really what was most fascinating was the entrepreneurship through acquisition part for me. And while I was taking your guys’ courses, either you or somebody had said, “Hey, you don't have to start a company to be an entrepreneur. You can buy a company.” And I knew that fit better with me because I don't have any special, particular skill. I'm not a software developer. I'm not a coder. I'm not a tradesman. I don't have anything that I could go and start from the ground up. And we had had some conversations about, you know, when it comes to being an entrepreneur and growing a business, the person that might be needed to take it from zero to five million might be different than the person that would take it from five to fifty, and somebody else might be needed to take it to fifty to five hundred million. Right? Like there's different skills required at a particular life cycle of a company. And so I knew that the entrepreneurship through acquisition was going to be my route. And what interested me about that at the time was, “Hey, I can better control my own destiny. I can make more money. I can have a better financial outcome.” There was a chart you had that showed the amount of like income and wealth that was generated over time. And it was like, you know, if you work in finance, you might make X, but if you become a business owner, you might start a little bit below, but you’re quickly, even just your salary, is going to potentially surpass what your salary is within investment banking and private equity. But then, at the same time, you're creating all this wealth, this equity.

Rick Ruback:

Wow, your recall of that chart is amazing. And every year when I show that chart, I look out to, you know, in each section now, ninety-five or so glazed eyes who look at me like, “Why am I looking at this?” And so I can't tell you how happy I am that you actually remember this chart. That's great. And as I remember the chart, it was buying a million and a half dollar EBITDA business at four times. And what you see is that, you know, depending on how you structure your search, and we'll talk about that in a second, but you could easily end up making millions of dollars, after five or ten years of owning and running the business. With a little bit of growth and a little bit of leverage, some real magic happens. And anyway, that's terrific that that stuck.

Jerod Pierce:

It totally did. And then I also felt like a lot of this for me has been luck along the way, right? So fortunately, the private equity fund that I worked at was an industrial focused fund. So, it was kind of, you know, sleepy businesses, gear manufacturing businesses, window and door components, stuff that most people would be like, “Why are you buying that?”, you know? Whereas for me, I was like, “I'll buy a doorknob manufacturer”, as boring as that could be. And so there's no guarantees of what's going to ultimately happen, but I felt like if I buy something that I can wrap my head around, and I'm willing to like work hard…when I was a kid, I remember we dumpster dived for food behind grocery stores. Like we jumped in the back of that dumpster and pulled out chicken or donuts or whatever we could eat. So, the thought of working hard, I've always worked hard. So that wasn't going to be an issue. So, it's just then, “Can I find the right business?” Right? If I can find the right business and leverage it, I think I'm going be OK. That's ultimately what I had to sell to my wife, because along the way I ended up getting engaged and shortly before I bought the business that I bought, three months before I got married, so my wife obviously had to be on board with, “Hey, this could go really well or it could not go so well.”

Rick Ruback:

So, can I ask you about the risk piece of it? Because I find that fascinating. If I had a life as a kid where I was hand-to-mouth, as you say, dumpster diving for food, and I had a job in a private equity firm that was paying me great money, more money probably than I could ever imagine making. I think I would be so hesitant to give up that steady income and maybe even the prestige of that position. “What do you do?” “I'm a Partner at a private equity firm.” A lot of prestige in that, right? Versus I own a doorknob manufacturer. So, I get the stable income and prestige and you were willing to put that aside and bet on yourself. How did you think about that risk?

Jerod Pierce:

Well, for me, that private equity job that I had post grad school, I learned a lot and they're great guys but it wasn’t a great fit for me. And so I knew I needed something different. That was number one. The second thing was I was still in Boston and I knew I wanted to get back to Seattle. I ultimately ended up doing a geographically focused search in the Pacific Northwest, really in Western Washington. So very tight search. And then the last part of risk is, when you've grown up the way I did, I don't seek failure, but I'm not afraid of failure, you know? It's kind of like, well, I've kind of seen the worst that can happen. The worst that can happen is you can be out on the street, dumpster diving, terrible place to be. And it's not like I was doing that for a long period of my life. I don't want to over exaggerate that, but I've definitely dumpster dived and I've definitely slept in a car and spent a night on the street with my mom. All, like I said, before the age of 10. So, that risk element wasn’t as great for me because of those reasons. And then the last piece was I truly believed that I could be successful. I think if you want to do this, you better believe that you can be successful. And growing up the way I did, some of the fortunate things in my upbringing was I interacted with a lot of different people. I can relate with a lot of different people. And then I go to Harvard and it's like very different people than people I grew up around, right? And disadvantaged kids, you end up getting this skill to relate with a lot of different people because it's what you have to do. And I did it at a very early age. Walking into a company, I believed that could be successful. And I, for the most part, if I walk into a room and there's 30 people, 25, 26 are going to like me. Four or five probably won't, but most people do. So that all helped me overcome this risk barrier.

Rick Ruback:

Yeah, unfortunately, when I walk into that room, the percentages are flipped, you know?

Royce Yudkoff:

I like you, Rick.

Rick Ruback:

Right, right. It's good to have one or two friends, right? That was great.

Rick Ruback:

It's interesting to think about Jerod's background and whether that positioned him well for search and the traits that allowed him to succeed in business.

Royce Yudkoff:

I think Jerod came from one of the toughest backgrounds you and I have seen among the scores of searchers we've taught and worked with. I mean, searchers, as you and I have remarked, come from all kinds of professional and family and economic backgrounds, but they do have some common traits. And, you know, maybe what would be fun is if you and I kind of went back and forth naming common traits that we see again and again, because I think listeners who are wondering, “Should I do ETA?” might really be asking themselves, “Am I like those people who do it?” And so…

Rick Ruback:

Yeah, okay, I'll go first. I'll go first, Scrappy.

Royce Yudkoff:

Scrappy is a trait we see a lot among searchers. I would say another trait is a strong desire for professional independence. No boss for me.

Rick Ruback:

I would say confidence.

Royce Yudkoff:

Yeah, that's right.

Rick Ruback:

Right? You need confidence. You need to have belief that what you're doing is right and that you have the skills and authority to execute.

Royce Yudkoff:

Yeah, that's exactly right. They don't come across as prideful people, but they do have this strong sense of, “I think I can do this.”

Rick Ruback:

Alright, your turn, Royce.

Royce Yudkoff:

Yeah, well, I think this is a close cousin of confidence but it's sort of a willingness to bet on themselves. These aren't reckless people, you know. You don't sense from Jerod that he's at all a wild risk taker. He measures the risks he takes carefully. It's just as he looks at being employed in someone else's company or buying a company and running it himself, he is comfortable betting on himself. He just doesn't see it as that much more risky.

Rick Ruback:

Yeah, I think that's exactly right. And then if this path doesn't work out, he'll hop on a different path, not the end of the world. It's like life presents challenges and opportunities and you sometimes can't tell one from the other until you're in the midst of them.

Royce Yudkoff:

Exactly, but, you know, you could easily imagine that Jerod, coming from the tough start he came from, would be acutely cautious about taking risks, you know, that he would get a good job and cling to that good job. But he doesn't think about his career that way at all. I think when he went off to search, he had a sense that he'd either find a business or if he didn't, he'd go get a job that was about as good as the job that he had left. So, I think in his mind, and I agree with him, while this was a big change in careers, it wasn't like a big step up in risk he was taking.

Rick Ruback:

I think he didn't think about it as being particularly risky because of the confidence he had in himself, which was great. I also think one of the things that's remarkable about him is his lack of concern about affiliation. He didn't for a moment reflect on, “Well, I came from a tough past with very little affiliation to anything prestigious. Now I have that affiliation with something prestigious. I've been to Harvard Business School, I have a job in private equity. He didn't hesitate for a moment.

Royce Yudkoff:

That's a really good point.

Rick Ruback:

Yeah, didn't hesitate for a moment. Didn't care. Are we still playing this game? I want to continue. I would say humility. One of the things I'm always struck by is I've never heard one of these successful searchers say, “You know why I'm successful? I'm successful because I'm smarter than everybody else. I am successful because I'm better looking, more charming.” I never hear that. What I hear is, “I work really hard. I made a lot of mistakes. Overall, more of my decisions were right than wrong. I got lucky in the way things moved. And I don't know why I was so successful. I just worked hard and good things happen.”

Royce Yudkoff:

That's absolutely right. And I think part of the reason why humility is so useful is you go through a process in searching of being the least knowledgeable person about a lot of the companies you're looking at, including the one you buy, and you just have to be willing to ask questions and make mistakes until you become an expert.

Rick Ruback:

Yeah, that's right.

Royce Yudkoff:

I'd offer one more. You know, this is a good list we're building because we've seen this again and again in people who choose to search and it's a nice comparison for people thinking about it, is that searchers generally are less concerned with the product or service of the business they buy than that it's a good quality business and that they can learn how to run it.

Rick Ruback:

For my last one, I'm going to go with flexibility and creativity because one of the things I find about successful searchers is they bounce off problems really well. They find a problem. They find a solution to the problem. They're not fixated. They work the problem until they fix it. And that's a different mindset than saying, “Oh, I have this problem. I don't know what the solution is. I'm done.” They do whatever they do, you know, go for a walk with their dog, go to the gym, spend 16 hours staring at their Excel sheet, whatever they need to do to make it work - but they figure out a way forward. And that's a remarkable trait. There's a bit of flexibility and creativity. It's, “Can I figure out what's going to work?”

Royce Yudkoff:

I like this list we've built and I think it's a useful list for people thinking if entrepreneurship through acquisition is for them to ask themselves, “Are some of these traits my traits or am I a different person?”

Rick Ruback:

Right.

Royce Yudkoff:

And now let’s go back to our conversation.

Rick Ruback:

Tell us about the search. So, you self-funded, right?

Jerod Pierce:

Yeah, I did.

Rick Ruback:

And what year was that? That was sort of before it became really popular, right?

Jerod Pierce:

Yeah, I started my search in October of 2016 and I closed in November of 2017. And I remember another thing from the course was it takes a searcher on average eighteen months to find a company. And so that's kind of what I was envisioning might happen for me, and fortunately it was thirteen months, which was great. So, for me, for the search, I self-funded. And so that was another thing you guys had talked about, was like, “Hey, look, you can go to the search and they're going to pay you a salary and you can do all these things. Or if you can self-fund you're going to get some equity and there's going to be a little bit of a performance-based element to it.” So, I was primarily a self-funder but if I found a business too big, there were a number of folks that had said, “Hey, we'd be willing to invest with you.” Some guys that I previously worked with in investment banking, some guys at the private equity firm, just other people I had known over the years, some mentors. So, there were some opportunities I looked at where it's like the purchase price was like 25 million bucks. And I didn't have any way of buying this thing, right? But I looked at it and considered it. But as time went on, it started making more and more sense to try to, if I could, buy a smaller company 100% myself. So, when I was search funding, I lived with my sister. She had a four-bedroom house. I lived in one of the rooms. I drove my grandma's car, which was a Ford Focus, which when I bought the company and I drove that to work, looking back, my GM still remembers that car and he's like, “I remember when I first saw that was like, is this guy serious? Is this really his car? Or is he just doing this to try to like relate to us?”

Rick Ruback:

It must have been like a clown car, seeing you getting in and out of the Ford Focus, right? That's a really tiny thing, as I recall.

Jerod Pierce:

It's not like a little Smart Car, but it's a small car. And you know what though, Rick? When I would go and meet with business owners, sometimes I'd park around the street because I didn't want them to see this car because they’d be like, “This guy has no money.” I had bought a town home in 2010. When I was doing investment banking, I bought this town home. And Obama had, it was a $10,000 tax credit, and so I bought this town home for 300 grand. I did FHA financing, which meant I only had to put 3.5% down. So, I put 14,000 bucks down and I got a $10,000 tax credit back. So, my net down was like four grand, and I could swing that, you know, just doing investment banking, this was manageable. And then my two best friends moved in with me. Well, that house that I bought in 2010, fast forward to 2017 when I'm searching, I bought it for just under $300 and I sold it for $595. So, I had doubled in purchase price but I had some equity in there too, so that now gave me equity to buy a company, a small company. So, as I'm like looking at companies, smaller in size, and trying to find ways to finance them, you know, my only route was really SBA financing, which meant if I could put down 10%, 15%, 20% on a smaller company, I could purchase it myself. And so when I ultimately bought a company called Mercurio's, I had some folks that had said, “Hey, we'll put up some equity for you to buy it.” But I was like, “You guys gave me a hundred thousand bucks and you get a third of the company.” It just didn't make sense. So, I put everything I had into it, just a hundred percent. So, the self-funded search for me was, you know, buying and selling of this property, that just random luck that had in Seattle had, you know, taken off over that time, in terms of property values. And then staying at my sister's house where I paid no rent.

The search for me was geographic in nature as well, and I think this is the only way to go. People that do national searches, personally, I think are crazy. It was really just like Western Washington. So, it had to be within an hour and a half, two hour drive at most from Seattle. I started off looking at machine shops and various manufacturing businesses. And when you're geographically constrained, you have to be open to a number of businesses and industries. So, as time went on, my search started to expand and it shifted to include home services, which obviously has gotten very popular now. But when I was searching, if I saw a truck with signage on it, I wrote down the name and called it. I have a database of probably 2,500 companies, all where my wife and I went in and categorized by industry, company name, who appears to be the owner. And you'd find that by going to The Secretary of State, typing in the name, trying to just triangulate, trying to get as much information as you could. Sometimes you go to those documents within Secretary of State, you open up their annual filing, has an e-mail address in it, boom, great. So put that e-mail into our database, e-mail them, call them, created a system. And so fortunately for me, by August, ten months in, I had three opportunities, two HVAC companies and one trash compactor business that sold and serviced trash compactors. And then I picked one of the HVAC companies, but for me it was a very relatively short search, primarily proprietary based. I obviously built relationships with all the smaller brokers and maybe like boutique lower micro middle market investment banks. But for me it was a lot of hustling. I still have owners to this day that I met with and grabbed coffee with that I'm friends with. And my message to them to get them to even meet with me was, “Hey, you know, even if your company is too big or too small or not a good fit for me, the worst that will happen is you'll know one other person and I will share with you what appear to be the strengths or weaknesses of your business, based on our conversation.” And sometimes it might be like, “Hey, Mr. Owner, you're just too involved. Like, it's going to be really difficult for somebody to buy your business right now because you're literally swinging the hammer and you only got two other employees.” So, that was a very long-winded answer.

Rick Ruback:

No, it was great.

Royce Yudkoff:

Rick, I don't know about you, but I'd be interested at this point in hearing a little bit from Jerod about the company he bought and what appealed to him about that target. Would this be a good time to turn to that?

Rick Ruback:

Yeah, absolutely. Absolutely.

Royce Yudkoff:

Jerod, help us out. Tell us about the company you bought and why you liked it.

Jerod Pierce:

Yeah, so I had two HVAC companies and, like I said, one trash compactor business.

Rick Ruback:

And HVAC is heating and air conditioning?

Jerod Pierce:

Exactly. Like everybody's trying to buy an HVAC company. Back when I was doing this, fortunately, nobody wanted to buy it. And so the one that I went for, what attracted me to it was, one, the size. At the time, it was doing just over three million in sales and $500,000 of cash flow. So, I knew that I'd probably be able to buy it for three to four times. I ended up buying it for three and a half. And why that was important to me was because I had enough cash, if I utilized SBA financing, to buy it 100% myself. So one, the size was right for me. The second piece was the employee count, they had fifteen employees. When I was looking for a business - and even now, I'm in the process of buying one – the number of employees and the size of the business is really where I start of like, “Am I interested?” And if it's got like five employees, I don't care what space it's in, unless I ended up doing some add-on acquisitions where I bought a really small company that fit. But when I was going out to search, I had to have enough employees where the employee risk just wasn't too high. You know, where it's like, okay, if somebody walked out the door, I’m screwed. So, the size, the revenue, the profitability work, fifteen employees, that worked. And the margin profile worked well. And then the price evaluation too. We had settled in at like three and a half times, which worked. And then the industry, what they actually did, was last. They install air conditioners and they install furnaces. I can wrap my head around that. They service them if they don't work anymore, I can wrap my head around that. You can, you know, try to get agreements and things in place to help you have a little bit more recurrent revenue. Makes sense to me. And then the other thing that I look for that turned me away from one of the other businesses was, I always tell people now when they ask, “You should look at what the owner's lifestyle is like, the current owner's lifestyle. And if it's terrible, you might not want this business either.” One of them, the guy, he's making like 70 grand, never went on vacation, just not a lot going on there, even though the business sounded really good. Whereas the one that I ended up buying, it was like, okay, this guy has, you know, a nice house. He's got some acreage. I can see he takes distributions. I can see he gets to go on vacation. I can see that he's really done at, you know, two. He's kind of in there in the morning and then takes off. Like he's not such a slave to this company, that I was like, “OK, so he can't be that critical.” And he was important, but it wasn't like he was there every day making it turn because I'm not a HVAC technician, right? I couldn't have told you what an air handler was before I bought the company. There's a lot I didn't know. So, in terms of why I chose the company that I did, I mean, that was it. The size worked, the number of employees worked, the industry worked. It was like, okay, this seems to be the right fit. And the owner and I got along really well. He originally said he was going to leave right away, but he ended up working for me for just over four years, in more of like kind of a consulting role. And as time went on, took a step back but taught me a lot about the industry. So, I jumped in with both feet after I bought the business.

Rick Ruback:

So let me just review because there's so many factors. But one of the things I think is important is it was location. It had to be in the Seattle area. That's number one. It had to be at a price between three and four.

Jerod Pierce:

Yep.

Rick Ruback:

It had to be the kind of business where you could understand, maybe not be an expert in, but understand. And I don't really care what the industry is, as long as the location's right, the price is right, the number of people are right. So, I'm not buying somebody's job. I'm buying a real business.

Jerod Pierce:

That's exactly it. And you know, Rick, your question earlier about, well, why take this risk and, you know, the prestige and stuff. I tell you, when I bought an HVAC company, people did look at me funny. They're like, “So wait, you left private equity to buy an HVAC company?” And I think a lot of people probably thought I was an idiot. But I tell them now, the industry's very different now than it used to be.

Rick Ruback:

That's great. That's great. And then you acquired others, right?

Jerod Pierce:

Yes, I acquired Mercurio's and I'd been looking for other smaller acquisitions. Four years in, I acquired another company. And at this time, you know, I ultimately grew Mercurio’s from 15 to 125 employees, including the acquisition. So, at that time, when I made my second acquisition, Mercurio’s was doing probably about 15 million in sales. So, we'd gone from three to fifteen and acquired another company that was doing seven million. So, that bumped us up to twenty-two. And I did SBA financing for that one as well. And when I acquired Mercurio’s, I didn’t mention it, but I did SBA financing and a seller note component as well, and then I bridged the gap with the equity that I talked about. Did a similar thing on my second acquisition, which was, I paid under two for my first one. I paid just over three for my second one. And so I was able to still use some more SBA financing.

Rick Ruback:

You had that $5 million limit, but you didn't exceed it because…

Jerod Pierce:

Exactly.

Rick Ruback:

…they were small.

Jerod Pierce:

So, I was still under five. Then the other one I did was a small electrical company that basically, call it like a half a million bucks of revenue, I really bought it for the electricians. There's three. You know, I would never have bought that company as my platform, if you will, as my starting search company, with only three, but it fit really well with us because we got a couple more licensed electricians and we got some trucks, and that's what we needed. Because the second company I had acquired didn't have an electrical department so, it worked out really well. And then the third one was another smaller HVAC company that was $3 million in sales. So, we went from $3 to $30 million in sales, but $10 million of it was through acquisition. And those two other add-ons, they were small, I just paid cash.

Rick Ruback:

And so you owned it all? At that point, you owned all the equity. Wow, that's fabulous.

Jerod Pierce:

Yeah, I'm happy that I did it that way.

Rick Ruback:

Yeah, yeah, I bet you are. I bet you are.

Jerod Pierce:

Because along the way, I bought the building and that was one thing that I like tell folks too, I'm like, you know, for me, I think that when you first buy a company, a lot of times the owners might want to sell you the real estate too. And that can sound attractive. And with SBA financing, they might give you a little bit longer of a term and an amortization schedule as well, if you throw in the real estate. But I always advise folks, “Get your feet under yourself with the business first and then buy the real estate after a year or two. Make sure you work in the lease and option to buy, et cetera.” And so that's what I did with the first business I bought. I ended up buying the real estate two years afterwards.

Rick Ruback:

That's an amazing journey. So, you went from basically $3 million to, what was your high point of revenue?

Jerod Pierce:

Just over $30 when I sold.

Rick Ruback:

Just over 30 and about a third of that came from acquisitions. That’s such a great journey and the other growth from say three to twenty, the organic growth, was that just hustle and marketing and getting in front of people and no rocket science? You didn't discover a new way of air conditioning the house or anything like that?

Jerod Pierce:

No. So one, embracing digital marketing, right? So, Google - it's basically a directory platform within Google search. So, if you search for HVAC repair, AC installer, furnace replacement, at the top of a search, there's going to be typically two to three companies that are really highlighted. This is different than Google Ads. This highlight is much more pronounced and it's at the top and you get a little green check mark. It says you’re Google Guarantee, which means that if the customer has an issue, Google will work with them to help resolve it. You know, we'd have to make it right, basically. Kind of like an Angie's List or a Yelp, but within Google Search. So, at the time, we were like the first one on it. And I swear that just gave us this huge advantage because we never lost that top ranking. So, you searched in Tacoma or in our markets, and we typically were always like number one or two, because as time went on, obviously, your competitors start doing the same thing. But I think we had the first mover advantage with that. So, that component was there. But then also when it came to marketing, a lot of folks will use a third-party marketing company, and they'll take an agency fee of 10 to 20 percent. They might want a monthly retainer too. I just thought that was crazy. And if you call Google, they will help you build Google Ads. If you call Facebook, they will help you build Facebook Ads. Microsoft will do the same, as well. And so I just worked directly with them to teach me on, “Hey, we can show you how to create that ad.” You know, Google at one point, said, “Hey, we’ve got these ads that it’s, our algorithm will just create the ads for you. Are you interested in doing that?” I was like, “Yeah, great.” Those are the best performing ads.

And then also focusing on branding too, for the company. The vehicles didn't have great signage on them. The employees didn't wear uniforms. There wasn't a great, like, communicated value proposition to the customers on why they should buy from us. You know, we'd go out, we'd pitch you guys, say, “Hey, you should buy an air conditioner.” But there was never like, “Here's why you should buy from us.” You know, we really shifted that conversation point of like, “The air conditioner is just the air conditioner, but it's the installation that matters and it's the ongoing service that matters.” So, our close rate increased, our average ticket increased, and then our customer acquisition increased through improved marketing. We started doing TV ads. When I bought the company, they spent less than $50,000 a year marketing. By the time I sold it, we were spending over a million dollars in marketing. We spent more in a month than we did in a year. I bought it in November of 17. I sold it in October of 22, so it was four years, eleven months. That's how much we had increased our marketing. And the cycle was really: market more, acquire customers, service them well, do good work, more people will come back, and then hire more people. Then it was just this funnel. And as we hired more people, we could do more work. And then if we did more work, we spent more on marketing, and then we can hire more people. And it just continued to go like that.

Rick Ruback:

A flywheel, a flywheel, just kind of boom, boom, boom, boom.

Jerod Pierce:

Yeah. My plan, my budget was never what ultimately was achieved. Like, nobody would have believed me.

Royce Yudkoff:

You know, one of the things you and I often see in successful searchers is they bring fresh eyes to a long-established company. And, you know, sometimes that's because they're a different generation and they just have a different way of thinking about technology, like the way Jerod spurred growth in his HVAC business by adopting social media as a marketing mechanism. I don't know the seller of the business, but the seller was retiring and from a different generation and probably less comfortable marketing through that medium. And so you often get with searchers, just a difference in perspective, a fresh perspective on how to manage and grow a company. You have a retiring founder who's made a lot of money for themselves and wants to have more personal time, and the management transitions to a young searcher who wants to build a big success and is willing to just work really hard. And that combination, simple as it is, often lights a fire in these companies.

Rick Ruback:

Yeah, we see it over and over again. I think in Season One, maybe the most poignant example is Robin Kovitz, who buys the business and the sellers are just completely happy working three or four months of the year and not worrying about what happens in the off season and not worrying so much about growth. And Robin is, I think, one of your favorite words, Royce, monomaniacal about growth. “How am I going to grow this business? How do I turn this seasonal business into a 12 month a year business?” And, you know, the sellers didn't even see that as a problem.

Royce Yudkoff:

Yeah.

Rick Ruback:

Robin sees that as both a huge opportunity and a challenge.

Royce Yudkoff:

You know, what's so nice about this, what's so rational about it is that you're not out hunting for some seller who's mismanaged the business. All the parties are rational. The 65 year old who's made a lot of money and wants to spend Fridays with her grandchildren or his grandchildren is behaving rationally. And the 30 year old who wants to build their career and their wealth is behaving rationally by behaving different. And it works.

Rick Ruback:

Absolutely. What's the saying? You find a person meets moment. My other favorite phase, “The harder I work, the luckier I get”, you see a lot of that in searchers.

Royce Yudkoff:

Yeah, that's right.

Rick Ruback:

Royce, let’s get back to the conversation. 

Royce Yudkoff:

Jerod, this is a, it’s an amazing journey you led the company on. I think Rick and I would love to know, first of all, did you enjoy this process? Did you enjoy being the CEO and owner as you built the company? And then what was it that led you to sell the business?

Jerod Pierce:

Yeah, I loved being the CEO, the person in charge. I really do. In fact, I don't know if I'll ever really go back and ever work for anybody else ever again. But leading a company has its, you know, pros and cons. Like, the cons are there's a lot of weight on your shoulders. Every decision is ultimately yours. There's some, you know, stress and pressure with that. And for me, you know, I meet some people and they want to buy a company but they don't want to be present. And that's just crazy to me. And so for me, I was very present. I was in the office every single day. If I needed to go out to a job site and help because somebody called out, I went out there and I helped. You know, I ran a line set if I had to. And as I was doing that, I was learning more and more about the industry, where customers could call me and I could, say, talk to them about the sequence of operation of a system. And it just made me a more credible leader and it made me a more credible leader within the staff too, within the employee base, because they're watching, right? I mean, if you're the last one in, and the first one out, they notice that and you don't get as much respect.

I pretty much knew all of our employees and so the best and the worst thing about leading the company is the employees, right? The worst thing is they come, they want things, they got gripes, you've got to hear them out and you got to take corrective action if it's warranted on something. But then also the best thing about it is it gives you an opportunity, and for me what I got a lot of joy was to meet and help grow a lot of people. So, we had some guys that started off as an apprentice, and then they became a lead, and then they became a manager, right? And along the way, they went from renting a house to owning a house. And there were times where somebody was like, “Hey, do you think I could get an advance, I need to pay for a home inspection, or I need to do this or that.” And so I would do that. I would give people advances. Sometimes we just would give them just an extra check, you know, not earth shattering things, but just little things that you could do for people to help them do better in life. And that's one of the best things about the people element of it, is you really get to like watch people grow and develop and help them along the way and build relationships with them.

So that part I loved and so when it came to selling the company, I did not have a plan to sell. This was supposed to be a company that I was like, “I'm just going to hold this thing, you know, forever, basically.” This space got so hot in 2022, and we had grown. You know, I bought it, we were doing $500,000 of cash flow. The year that I sold it, we did $6.8 million. So, we had grown enormously and we were very, very profitable. And we were now like the market leader where we were. And so, in terms of selling the business, it was purely financially driven. And I told folks, I was like, “Look, I now have a general manager. I now have a sales manager. I have a controller. I have an install manager. I had department managers. Like I did not have to be there every day, this was pretty much running itself without me. And so the multiples and the numbers that people were throwing around, I was honest with them. I was like, “Hey, this is purely about the money because I enjoy what I'm doing and I'm young.” Like, if you were going to give me six, seven times, I wouldn't have sold. But when you start talking double digit multiples on the amount of cash flow that we had, it was just going to be life-changing money for me, right? And my wife was like, “This is probably the opportunity, this is probably the time.” And there were a couple of my employees, I had no obligation to, I gave them over a million bucks. I gave the foster care organization that sponsored me growing up, gave them a million bucks, and just felt like, “OK, well, this will afford me the opportunity where I never have to work again if I don't want to, as long as, you know, I guess the world doesn't fall apart.” And so that was the driver of it, and the group was a good group and seemed like the right fit.

Rick Ruback:

That's such a fabulous journey and such an interesting transformation of your life.

Royce Yudkoff:

Yeah, I agree with Rick.

Jerod Pierce:

I never deemed it possible.

Rick Ruback:

Yeah, could your 12 year old self imagine that you'd go from...?

Jerod Pierce:

No. It’s been the best thing that ever happened to me.

Rick Ruback:

Other than being married, you're supposed to say, “Other than being married.”

Jerod Pierce:

Yeah, yes. And I have kids too.

Rick Ruback:

Yeah, yeah, yeah, and the kids too, right, right, right.

Jerod Pierce:

From a professional standpoint.

Rick Ruback:

Yeah, that's better.

Jerod Pierce:

You know, I'm in Mallorca, Spain right now. And before this, we were in Germany. And after this, we're going to the south of France. And then we're going to go to Seattle for a couple months. And then we're going to go to Houston. We've since moved to Houston, which is where my wife is from. And so now we have sun twelve months a year versus three months a year, when I was just in the Pacific Northwest, but we go back to Seattle for the best time, still have our house there and stuff. So, it's nice.

Rick Ruback:

You can do the air conditioning in Houston, which is like absolutely required, right?

Jerod Pierce:

Yeah, yeah, no, it is. It is. If the right opportunity came up, I would buy an HVAC company in Houston.

Rick Ruback:

I saw on your website that you've been investing in both real estate and other businesses?

Jerod Pierce:

Yeah, so after selling, I did roll 20%, so I still have an equity component with Mercurio's and I'm still like a consulting role as well, but have basically created a family office, which have now also gotten really popular. But where we're just investing our own capital and have bought quite a bit of real estate in the last couple of years, but then now supposed to close on an assisted living facility here in the next thirty days or so. And also, I'm looking at acquiring an automotive and residential glass business. So, I think both of those should happen. And I'm kind of doing this model of buying some real estate, buying some businesses. And for me with businesses, I think I'll ultimately buy maybe just these two, maybe one more. I still like to be present. I think companies are just more successful when you're around. I don't understand when people talk about buying a company and thinking that you can just run it from afar when it's still small. You have to grow it. I genuinely believe that.

Rick Ruback:

Yeah, I get you. You know, Jerod, we always end by asking our guests if they have any questions for us so, anything for us?

Jerod Pierce:

Everybody's talking about buying a business and entrepreneurship through acquisition. And when I was doing it, it was popular but not nearly as popular as it is now. How has it changed? Like, what are you guys seeing? Is it becoming just more and more competitive for searchers out there? Is it becoming better for searchers, with all the awareness around this in the sense that people are like, “Oh yeah, I know what a search fund is.” It just seems like the popularity of buying a business has taken off exponentially. What's some of the stuff you hear from current searchers and current students on the industry as it stands today?

Royce Yudkoff:

Yeah, I have a thought and I'm sure, Rick, you have a thought as well. So, Jerod, you're right. The number of searchers say over the last 10 to 15 years, has grown a lot from an almost infinitesimally small number to a sizeable number compared to that. But it's still a very small number compared to the tens and tens of thousands of smaller companies across the United States that come to market each year. And, you know, one of the things that Rick and I like to do is look at a certain class of company and see if the multiples paid by searchers is changing or not. Because that's a little bit of the canary in the coal mine, right? If you think that there are too many searchers, the way you're going to see that first is prices are going to get bid up. And so, Rick and I like to look at regular way, business to business service companies, like the companies you bought, with sort of a million to a million and a half dollars of EBITDA, and see what multiples are being paid by searchers. And, you know, from the time Rick and I started doing this fifteen years ago to today, the multiples just haven't moved very much. Maybe it was three and a half to four times cashflow ten years ago, and now it's four to four and a half times. So, price hasn't changed, which tells us that you're not getting over-crowded on the buy side. Now, there are certain segments you can pick out that become popular and it's different. HVAC, as you mentioned, private equity has come in and is doing roll-ups. Subscription software businesses have become popular, but you can count on one hand the segments that have become really popular and multiples have taken off. But in terms of the type of companies, size companies you bought, we really haven't seen that overcrowding, and I think it's because the total number of searchers just still is not that large relative to the number of businesses. But Rick, you probably have some comments and thoughts on this as well.

Rick Ruback:

I would just add that I think you're seeing more people do it because it's a good idea and it just makes sense. People hear stories like yours, that this is a path that can be transformative, that you can build your life in a way that you want. Maybe you'll do what you did and build generational wealth, but even if you don't do that, you're building the world you want to live in. And that is so appealing.

Jerod Pierce:

Yeah, it is.

Rick Ruback:

So, I'm not surprised that more and more people are doing it because it makes sense.

Royce Yudkoff:

Jerod, it's been an absolute delight for Rick and I to spend this time talking with you, and we're so admiring about the journey you took. And I'll tell you something, I can't remember what grade we gave you in our course but it should have been the highest grade. And if it wasn't, on behalf of Rick and myself, we apologize.

Rick Ruback:

We're boosting the grade. We're retroactively boosting the grade.

Jerod Pierce:

It's all good.

Royce Yudkoff:

All right, well, thank you so much.

Rick Ruback:

Thank you. It's been a delight.

Rick Ruback:

Royce, I thought that Jerod's story was fascinating. I hope you did too.

Royce Yudkoff:

I loved hearing it. I thought it was very inspiring.

Rick Ruback:

What I couldn't help but walk away with is just thinking about how it's emblematic of what's great about American capitalism. Here we had a kid growing up in the system, foster families, dumpster driving for food, in and out of various schools, very disruptive family life. And, you know, he gets some breaks for sure. He gets to go to a couple of good schools and then eventually gets great jobs and ends up at the Harvard Business School and gets a great job after that. But then goes and does something entrepreneurial, buys a business, and totally transforms his life.

Royce Yudkoff:

Yeah, one of the great things about American capitalism is you're measured on what you can do for your customers. And I think that is most true when you own your small business because no one cares about your background or your beliefs or who you are. They just care that the repairman shows up on that cold December night when your boiler stopped working. You know, they'll pay a fair price for that. And so small business has a way of transforming you, no matter where you started, into what you'd like to be.

Rick Ruback:

Yeah, they care about the quality of the service. They care about the price. They care about that it's fair.

Royce Yudkoff:

I think that's why Jerod's story is so impressive, because not only did he transform his life into the life he wanted to have, from a tough start, but it shows one of the best things about our country and about capitalism, where it really works in letting people do that.

Rick Ruback:

Yeah, he's just a businessman doing business stuff and doing it well and honestly and fairly and just growing his business, delighting his customers, he gets all these wonderful things. And one of the things he mentions that I think is really interesting is that as he benefited, his employees also benefited. The quality of the jobs improved. I think what we learned from Jerod is that part of the magic of doing well in business is treating your employees well.

Royce Yudkoff:

You and I see this a lot with small business owners and ETA-ers, that they get a lot of meaning out of making their employees' lives better by providing good jobs. I remember we had a guest in class who bought a company as an ETA-er and one of the students asked him how he felt about his employees and he paused for a moment and said, “My employees, they're my flock.” And I was very moved by that way of describing his employees, but I think it's true about a lot of small company entrepreneurs, which is they care about providing good jobs to these people who, in turn, buy homes for their families and give their kids what they need. It's a very moving experience.

Rick Ruback:

Right, and the owners facilitate that. They might give advances on pay, they might help with a down payment on a home, they might help with college education. We've seen examples of all of this in our fifteen years of talking to small business owners, and I think it's all very genuine. It's great to see.

Royce Yudkoff:

It is great to see.

Rick Ruback:

And I think we should talk about his decision to sell. I think it was fascinating. Here he is, he totally transforms his life. He's built the world he wants to live in. He's four or five years into the business and yet he decides to sell.

Royce Yudkoff:

I view Jerod as having one of the qualities we see again and again in entrepreneurs through acquisition, which is they are not reckless risk takers. They, as you and I like to say, they measure risk out with an eyedropper. And one of the ways you see that is when Jerod has the opportunity to make a great deal of money, a transformative amount of money, or he has the opportunity to keep going and see what's behind the curtain a few years later, he makes the very sane choice, that he can transform his family's life, and that's much more important than doubling or tripling the amount he could make. To me, it's a display of discipline and maturity and risk management that he would step away.

Rick Ruback:

Right. What I find really interesting is he was able to lock in the lifestyle that he really wanted. He could support his family. He could educate his kids in the way he wanted. He could satisfy his philanthropic desires. He could do all kinds of interesting things that he wanted to do. And what he chose to do is to lock that in instead of see what happens next, as you say, what's behind the next door. And you know, it's a very personal choice.

Royce Yudkoff:

It feels like a very mature decision and a very wise one, doesn't it?

Rick Ruback:

It sure does. And, you know, let the next person with perhaps different resources and different vision come and try to transform the company yet again. But locking in this personal wealth, locking in the lifestyle, the family life, the flexibility for your future is just such a great gift. And I can't imagine turning that down.

Royce Yudkoff:

Well, Jerod didn't and he seems pretty happy to me.

Rick Ruback:

Yeah, he seemed really happy to me too. Royce, what a great story. It's really a story about the power of our market economy and the opportunities that it presents and the opportunities you get through entrepreneurship through acquisition. He's really been able to accomplish so much. It's been such a great joy to be part of that journey. Next, Royce, we have an unusual episode. We're not having a guest. Instead, we've gotten some great questions from our listeners. And next week is Labor Day. We're taking it off. But on September 9th, we're going to provide answers to the questions that our listeners have provided. And, you know, if you still have a question, send it in. We're collecting those questions and preparing our answers and it'll be a show of just back and forth with Royce and I answering listener questions. Looking forward to that.

Royce Yudkoff:

Me too. You’ve been listening to Think Big, Buy Small. We’re your hosts, Royce Yudkoff…

Rick Ruback:

…and Rick Ruback.

Royce Yudkoff:

Katie Zandbergen produced today’s episode. 

Rick Ruback:

Our audio engineers are Mari Shear and Craig McDonald. If you have any questions, comments, thoughts, feel free to just e-mail us – rickandroyce at hbs.edu.

Royce Yudkoff:

We’ll be back with another episode of Think Big, Buy Small.