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America’s New Millionaire Class: Plumbers and HVAC Entrepreneurs
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From the Wall Street Journal
America’s New Millionaire Class: Plumbers and HVAC Entrepreneurs
Private equity is pouring money into skilled-trade small businesses; ‘Next thing you know, you’re running an empire’
By Te-Ping Chen
Aaron Rice has two logos tattooed on his left leg: one from the plumbing business he co-founded more than a decade ago, and another from the private-equity-backed company that recently bought it.
Few businesses are as vital to their customers as local plumbing, heating or air-conditioning companies—especially in places like Tucson, Ariz., where Rice works and residents sweltered in 100-degree heat most days this summer.
For years, Rice, 43 years old, was skeptical when out-of-state investors offered to buy his company. He assumed most of them knew little about skilled-trade work or his customers. They were just looking to make a buck. But in 2022, when approached by a local HVAC company backed by private equity, he changed his mind, figuring that they knew the business.
“The trades are hard work. A lot of today’s society, picking up a shovel is foreign to them,” he says.
Private equity, however, is no foreign player in the skilled trades these days. PE firms across the country have been scooping up home services like HVAC—that is, heating, ventilation and air conditioning—as well as plumbing and electrical companies. They hope to profit by running larger, more profitable operations.
Their growth marks a major shift, taking home-services firms away from family operators by offering mom-and-pop shops seven-figure and eight-figure paydays. It is a contrast from previous generations, when more owners handed companies down to their children or employees.
The wave of investment is minting a new class of millionaires across the country, one that small-business owners say is helping add more shine to working with a tool belt.
“You don’t need to go to Silicon Valley to have a successful career and entrepreneurial opportunities,” says Brian Rassel, a partner at the Detroit-based Huron Capital, which focuses on investments in service companies.
The paydays
If you live in a big metro area, chances are one of the service trucks you have seen drive by has recently changed hands. Private-equity investors have purchased nearly 800 HVAC, plumbing and electrical companies since 2022, according to data from PitchBook. And those are just the biggest deals—plenty of smaller-scale purchases aren’t tracked, and sellers are reluctant to share exact details about their PE payouts.
“Everybody and their uncle owns an HVAC business in the private-equity space today,” says Adam Hanover, chairman of Redwood Services. The PE-backed home-services company bought Aaron Rice’s business in 2022 and merged it with Rite Way, a larger Tucson-based HVAC operation that Redwood acquired the year before.
Redwood has acquired 35 companies in the past four years. They range from smaller outfits (such as Rice’s), which Redwood says it buys outright for an average of $1 million, to more sizable companies (such as Rite Way), with an average valuation around $20 million, in which it takes majority stakes.
The trades have long offered solid hourly wages for workers without college degrees. They are also springboards for those with bigger entrepreneurial ambitions.
In Rice’s case, he struggled with addiction and had spent five years in prison for selling meth before co-founding his plumbing business in 2012 with his business partner, Mike Nagal. It specialized in sewer inspections and repair. At the time that they sold the company, it had 18 employees and was bringing in about $3 million in revenue a year.
Though the duo hadn’t planned to sell, they liked the fact that the company would become part of Rite Way, another local outfit, and that Redwood wanted owners to continue holding a stake and have a major say in management.
Rice continues to work as a sewer department manager at Rite Way, and plans to stay with the company until he retires in seven years at age 50—something he’s looking forward to. His co-founder has remained with the company, too.
“I want to hunt, fish, drink beer and cook meat,” Rice says, adding that selling his company has given him greater peace of mind for his family.
For private-equity investors, the strategy is one that has been put to use in industries as varied as carwashes and nursing homes: Roll up businesses to create larger players and improve their margins by adding managerial know-how, back-office efficiency and beefed-up marketing and recruiting budgets. Critics of the PE model say that it can mean higher prices for consumers and less competition, but others say it can improve service quality and boost the bottom line.
Building an empire
New ownership has paid off for Rite Way. Under Redwood, the company has gone from $30 million in annual revenue to around $70 million.
Along the way, Rite Way acquired companies to expand beyond HVAC, with plumbing and electrical services. More capital helps it tap a wider customer base. It also helped add dozens of additional service trucks, increased head count, started an apprenticeship program to train new workers and increased sales training for technicians. Redwood also brought in accountants to scrutinize the bottom line.
Small-business owners are often too busy to juggle such an array of tasks, or they charge prices that are years out of date, says Richard Lewis, chief executive of Redwood Services. Redwood’s home-services businesses examine their prices on a quarterly basis to ensure they are in line with the market.
If the cost of a screw goes up, it gets passed on to the customer, Lewis adds.
“It’s taken a lot of stress out of the business,” says Rick Walter, Rite Way’s former owner. Walter, 67, retains a 25% stake in the company and has agreed to stay on as president for a few more years. After that, he plans to enjoy his retirement with his wife and family—and their Colorado vacation home purchased with proceeds from his company’s sale.
“This business has been 60 to 70 hours a week for years,” Walter says. “I’d be out till 9 or 10 p.m., selling heating and cooling systems, and she stood behind me the whole time.”
A decade ago, nine out of 10 small-business owners in the skilled trades looking for a buyout wanted to retire and be done, says Ted Polk, a managing director at Capstone Partners, a Boston-based investment banking firm. These days, a growing number of them don’t want to ride off into the sunset. Around a third are entrepreneurs who want to stay with the company and find ways to grow.
“They see what they can do on their own is a fraction of what they could if they had somebody behind them, saying, ‘I’ll help you buy these guys and those guys,’” says Polk, who has done deals in the skilled trades ranging from $30 million to more than $200 million. “Next thing you know, you’re running an empire.”
Workers benefit financially, too, says Graham Weaver, founder of private-equity firm Alpine Investors, based in San Francisco. Alpine, an early investor in HVAC companies, says technicians at the HVAC businesses it acquires get a 20% pay bump in the first year after a company is sold, mostly through a combination of higher wages, bonuses and commission. The company has rolled up more than 200 companies across 43 states into a larger service platform, Apex, which did a combined $2.2 billion in business in the past year.
Given the surging investor interest, Weaver says, anyone with entrepreneurial ambitions should take a second look at the trades, which offer steady income via unclogging toilets, fixing boilers and installing new air-conditioning units.
“You can build a business that’s going to be worth $10-30 million and have a ready list of buyers to sell it to,” he says. “Ten years ago, there was no one to sell it to.”
Still, some workers say that when private equity buys up their companies, they wind up pushing new systems on customers, rather than simply fixing what’s not working. The pressure to make sales is less satisfying than doing real repair work, some sounding off in online forums say.
Grit and the American dream
Selling can also be bittersweet. Dana Spears co-founded an HVAC company in Land O’Lakes, Fla., in 2006, later buying it outright in 2008, when it had 14 employees, leaving her with $4,000 in the bank. When Covid hit, outside investors woke up to the importance of essential businesses like hers. More than 100 offers to buy the company have poured in since 2020.
Spears, 51, resisted selling because she worried about her 100 employees.
“I have employees who’ve worked for me for 16 years,” she says. “I don’t want this to be an overnight flip and they don’t have a job.”
But around her, private equity was buying her peer companies, and she felt outgunned. Her newly acquired competitors could negotiate better pricing and deals on everything from equipment to workers’ health insurance.
With larger fleets, they could offer faster response times and higher wages, too.
Earlier this year, after much deliberation and meeting with numerous buyers, she settled on a firm she felt she could trust, P1 Service Group.
Exiting the business was a wrenching decision, but the opportunity also felt too good to pass up, says Spears, who declined to disclose how much the company sold for.
She is taking a year off to spend with her family, and is already thinking of founding another home-services business.
“It’s like we’re finally seen and recognized,” Spears says. “The trades are one of the businesses that, if you have the grit, you can go and do the American dream.”
