The key employee problem in trades acquisitions

The database has two HVAC acquisitions, and the difference between them comes down to one person. Nathan Lenahan bought Bart's Heating & Air with no HVAC experience and says the buyer does not need to know the trade, as long as someone inside the business does, and keeping that person is the real due diligence. Dan Burnside bought a larger HVAC company and watched a key employee leave and start a competitor. Lenahan set out to take his to $2.72 million the following year. Burnside's ended in bankruptcy.

What the key employee actually holds

In most of this database the asset is easy to point at: trucks, machines, a customer file. In a licensed trade a large part of it sits in someone's head. Burnside's entry puts it plainly: the license, the relationships and the diagnostic skill often belong to one person, and buying the company does not buy their loyalty. If that person leaves and competes nearby, the customers who already know him tend to go too.

Burnside's purchase looked like the best deal on the site. The company did $2.1 million in revenue with roughly $800,000 of seller's discretionary earnings. After closing he found the seller had misrepresented the business, the key employee left and started a competing company, the technicians resisted the changes he brought in, and hiring replacements in a small market proved brutal. He earned his Master Mechanical Contractor license along the way and still could not hold it together. The numbers on the deal were large. The thing that failed was a person.

Choosing a trade where the knowledge travels

Lenahan's choice of HVAC was partly an answer to this problem. His reasoning is that, compared with electrical or plumbing, HVAC sees the same ten or twelve problems over and over, which keeps inventory, supply chain and training manageable. A trade where the common failures repeat is a trade where you can teach the next technician. That does not remove the key employee risk, but it shortens how long you are exposed to it.

He also bought something that belongs to the company rather than to a technician: about 70 annual service contracts, each netting $150 to $250 a year. Seventy contracts is small money against $1.2 million of revenue. The value is that a maintenance agreement is signed with the business, so the customer's next call goes to the office and not to someone's cell phone. Growing that book is the obvious first move for any buyer in the trades category, and part of the reason is that it moves relationships off individual employees.

The buyer does not need to know the trade. Someone inside the business does, and keeping them is the deal. Nathan Lenahan's rule, paraphrased

When the key employee is the seller

Often the person who holds the business together is the owner who is leaving. The exit ledger quotes industry benchmarks that put founder-dependent operations, where the owner personally dispatches the work, roughly one to one and a half turns lower than comparable companies. That discount is the market pricing the same risk Burnside ran into, from the seller's side.

Adam Hill bought around it. His $60,000 Tampa Bay vending route came from an owner who was moving away, and what Hill paid for was placements: relationships with property managers that the previous owner had built one at a time. Placements are attached to machines sitting in buildings, which makes them easier to inherit than a technician's customers. Hill now grosses over $58,000 a month from more than 100 machines. Dan Spracklin bought Gray Brothers from his father-in-law in 2013, with 22,000 customers on a three to five year pumping cycle, and his wife had worked the company's back office in high school. A family transfer is about as close as a buyer gets to knowing what is inside.

When the key employee becomes the buyer

Ryan McCoy is the inverse of Burnside. He joined Scoop Soldiers' corporate team in 2017 as the first manager of its Dallas market, ran it as an employee for two years, and bought that territory when the company began franchising in 2019. Within a year he had more than 1,100 clients and over $900,000 in revenue. He already knew the routes, the customers and the staffing, so the person a buyer would normally worry about losing was the buyer. His entry warns against reading that year-one number as a template for that reason.

For anyone planning to buy a trades business, that is the cheapest protection available: work inside the trade first, or partner with the person who does. Our piece on buying or building makes the same point about McCoy from a different direction.

Building a business that does not have one

Some owners removed the single point of failure themselves, before anyone else had to price it. Johnny Robinson and Sergio Silesky moved Orange Window Cleaning to subcontractor crews in 2019 and ran acquisition, scheduling and quality from laptops. They sold it, and it still runs above $1 million a year under new ownership. Kyle Landwehr hired an operations manager at roughly $75,000 a year in his third year of junk removal and watched his margin fall to about 20 percent, which his entry describes as the price of the founder no longer being required.

John and Tom D'Eri came at it through retention. Their Rising Tide car washes, staffed largely by autistic adults, report attrition well below the industry norm, and they built color-coded processes and QR codes at each station that pull up a short instruction video. Knowledge that lives in a video at the station does not leave when someone quits. Kim Hatch pays for retention more directly, keeping trained septic crews on payroll through winter months of about $30,000 so she is not short in $200,000 ones. The rural paradox piece covers why that matters most in small markets.

Questions to ask before closing

Who holds the license, and does the company still operate legally if that person leaves next month? Which employee do the ten largest customers call by name? Has that person been told about the sale, and have you spoken to them without the seller in the room? What share of revenue is under contracts signed with the company rather than handshake work that follows a technician? Burnside's entry adds that holdbacks or earnouts keep some of the seller's money at risk after closing, which helps with misrepresentation, though no structure keeps an employee from walking.

The margin ledger shows what each documented trade keeps once employees are on the payroll, and the database has full sourced entries for every owner named here. This site is one of SideRoad's weekly builds, and the trades category will add owners as more acquisition buyers publish their numbers.

Common questions

Do you need trade experience to buy an HVAC or plumbing business?

Nathan Lenahan bought an HVAC company doing about $1.2 million with no HVAC experience. His view is that the buyer does not need to know the trade as long as someone inside the business does, and that keeping that person is the real due diligence.

What happens if a key employee leaves after you buy a business?

In the one documented failure in this database, Dan Burnside's rural HVAC acquisition, a key employee left and started a competing company. Combined with seller fraud and a thin hiring pool, it ended in bankruptcy. In a small market a departing technician can take both capacity and customers.

Do owner-dependent businesses sell for less?

Yes, according to the benchmarks quoted in the exit ledger: founder-dependent operations, where the owner personally dispatches the work, trade roughly one to one and a half turns lower than comparable businesses that run without the owner.