A couple of days ago, the Wall Street Journal ran a front-page article that is loaded with meaning for people in the trades. It described a trend of private equity investors buying up residential plumbing, HVAC and electrical companies. Some of these investors may have experience in the trades, but others don’t. They simply know how to run a business, any business, profitably.
A little background is in order to understand the significance of this trend. You see, historically most residential trade businesses have been small family-owned firms, typically passed down from father to son or to other family members when the founder retires. In cases where there are no family members working in the business or interested in running it, company founders often had trouble selling it to outsiders for anything close to what it was worth to them. That’s because there are few tangible assets in such companies. The owner could sell off trucks, tools and equipment, but that would bring in only a tiny fraction of what’s needed to retire in comfort.
The real value of a trade business is in its reputation among a customer base built up over many years of reliable service. Except most of the time those customers’ loyalty is tied to personal relationships with the owner and/or long-time employees. Once that’s gone, customers have no reason to continue doing business with the company, unless another family member or existing employee takes it over. Tradespeople who work for an heirless company often see their jobs disappear when an owner retires. (Sometimes employees try to buy the company, but that rarely succeeds because the employees usually don’t have enough money or means of finance to make it worthwhile for the retiring owner.)
Private-equity firms are made up of experienced businesspeople who add value to such businesses with management know-how. They come up with smart management, greater efficiencies, better training, recruitment and marketing practices. They draw customers to a company brand rather than individual relationships, and they are interested in growing the business by covering more territory, offering new services and expanding to new locations.
Not that there’s anything wrong with building close personal relationships with customers. It’s just that, again, that tends to disappear when an owner and/or key people decide to retire or leave. You probably don’t know the names of people who own and manage your favorite supermarket, clothing store or drugstore. But if you’re satisfied with the way the store operates, you will probably continue to do business with outlets of the same name if you move away. You are loyal to the brand, not the individuals who run it.
This creates many more opportunities for tradespeople. If you work for a small family-owned business, there are limited opportunities to advance and earn top dollar. In a larger, constantly growing, professionally run business, new opportunities are abundant. They need people to staff and manage new openings and are constantly looking to incorporate new ideas and best practices into their operations. Most private investors recognize that talented people are the greatest asset of a trade business and are willing to boost training programs and pay top tradespeople more than they could make working for a small mom-and-pop shop.
Apart from the economics of these deals, what I find most encouraging about this trend is that smart businesspeople recognize the value of skilled tradespeople at a time when they are in short supply. A great awakening is occurring around the country in which skilled tradespeople are being put on a pedestal and recognized for the value they provide to our society.