Full transcript10 chapters · 8,461 words
00:00Crossing a billion in under five years at Kelso
Steve Carroll: I put out there that we would grow Kelso to a billion dollars of revenue and pretty much everybody was like, I like working with you or I like partnering with you, but that seems kind of crazy. And I can report now as of a few months ago in the last trailing 12 months, we have crossed
Steve Carroll: a billion in less than five years from when we started. So I believe outrageous goals can be accomplished, but you’re never going to accomplish the goal if you don’t at least put a goal out there to work towards.
Tyler Martin: Welcome to Profit and Grit with Tyler, where blue-collar owners and insiders spill the real story behind their hustle, building businesses that thrive through sweat and smarts. We’ll dig into their journeys from scaling chaos to growing the bottom line with lessons and grit that pay off big.
Tyler Martin: Here’s your host, the blue-collar CFO, Tyler Martin. Today’s guests nearly missed payroll. worked 100-hour weeks to keep the lights on, and somehow turned that disaster into a billion-dollar success story. Steve Carroll built Kelso from one struggling HVAC company into a national service group by doing things most owners avoid, tracking the right numbers, protecting payroll at all costs,
Tyler Martin: and learning from pain instead of hiding from it. We talk about the moments he thought the business was done, what he did first to fix a cash crisis, how he kept his team’s trust when everything looked shaky, and why he’d rather partner with owners than buy them out.
Tyler Martin: This one’s packed with real lessons on urgency, leadership, and running a growing business without losing control of the numbers. Let’s get into it with Steve. Hey, Steve, welcome to the Profit and Grit Show. How are you doing today?
Steve Carroll: I’m doing great. Thanks for having me on, Tyler.
Tyler Martin: Yeah, thanks for being here.
02:01What MEP+ means and running jobs in 35 states
Tyler Martin: I’d love to start out just learning about you. What do you do professionally?
Steve Carroll: I am the co-founder and CEO of Kelso Industries.
Tyler Martin: Tell me a little bit about Kelso.
Steve Carroll: Kelso Industries, we are a national mechanical electrical plumbing. We call it MEP+. We’re an MEP plus service provider for commercial and industrial clients, building owners, property owners. We try to be a partner for our clients with their CapEx needs and help them solve their
Steve Carroll: cooling, heating and water and air solutions.
Tyler Martin: Very cool. And how about something personal about you? Anything you want to share or you’re open to sharing?
Steve Carroll: Yeah, I’ve got, I’m married, have three kids. under 12. And I’m from Oregon originally. So from a rural town in Oregon called Sandy, Oregon, and got a little bit of a trip around the world, living in different places, but happy to be where
Tyler Martin: we’re at now in Arizona. Yeah. And you just, from a business standpoint, you’re like constantly
Steve Carroll: traveling, right? Yes. Yeah. Yeah. I’ve seen a lot of the U.S. in particular for business and we’re looking for partners all over and we spent a lot of time meeting and traveling to meet
Tyler Martin: partners, potential partners all over the U.S. Yeah. Before we get into the first part that I want to talk about, I know you’ve done 28 acquisitions in three plus years, we’ll say. How many states are you guys in?
Steve Carroll: Well, we operate in many, many states. I think the last count was at least 35 states we’re running projects in currently right now.
Tyler Martin: Oh, very cool. Wow. So you guys have a big thumbprint already across the states.
Steve Carroll: We do. And it’s growing because our clients are bringing us to various parts of the country always. And we’re happy to partner with good clients. And that could take you anywhere. In fact, we’ve done work for some of our clients in the UK.
Steve Carroll: We’ve done work for some of our clients in Mexico and Canada. We’re not currently doing work in those places, but ask me a few months ago, we were, and we’re excited to partner with good clients wherever they may be.
Tyler Martin: Yeah. So here’s where I want to start. I want to go back to your story at Walmart, where you grew a division pretty big.
04:27Growing a Walmart division from $15M to $250M on urgency
Tyler Martin: You went, I believe, from $15 million all the way up to $250 million, and you did that in like three years. And really what I want to take away from that, well, I want to talk a little bit first. How did you do that? Like, what was your take me through that story a little bit?
Steve Carroll: Yeah. So for those of the listeners that have a corporate career, I think you can relate. There’s a journey inside of big companies to stand out and be a part of transformative and big changes in the business. And after a number of years at Walmart, I was fortunate to find a part of the business
Steve Carroll: that was under-invested in and was able to bring some expertise. And frankly, the biggest thing that I felt I learned during that time was you can move fast, you can act with expediency, and you can bring a level of urgency that you can stand out personally and you can actually help
Steve Carroll: your business grow at a pace that wouldn’t normally happen if it weren’t because of your urgency. And for me, that’s how I stood out. That was how my boss, the gentleman I worked for, his name was Abhishek Subramanian. He works for Walgreens right now. And he and I, we tackled
Steve Carroll: the world together. And late nights, we had a level of urgency that was just on fire. And it was the most fun I’d ever had in my career at that time because it felt like I might get fired
Tyler Martin: at any moment. Why is that? Because you were pushing the envelope? Yeah, you’re pushing the
Steve Carroll: envelope on stuff that a lot of certain people don’t want you to do because it’s maybe moving their cheese. It’s part of their department, but it’s also part of yours and you want yours to grow. You have to get a lot of stakeholders to buy in because you’re effectively causing people around
Steve Carroll: you don’t have to work harder, but you’re selling all the time. You’re convincing executives that there’s a benefit to this. In fact, the type of work that we did there now is many, many,
06:35Why a $5M shop needs real finance before it grows
Steve Carroll: many times bigger. And we really set the stage for what this type of business can become through the urgency that we brought to the table every day. And that was game-changing for me personally. And I’ve brought that to Kelso because I just, I love operating that way.
Tyler Martin: What would you say for like a business in the trades, whether it be MEP or HVAC or just some trade business, five to $10 million business, what are some changes that you guys made that might translate into what a business that side might be thinking about?
Steve Carroll: Yeah, five to 10 million is an interesting size because the owner is probably doing a lot. And I think if we polled a lot of the owners, they would say they’re working hard. They’re working late. They’re doing a lot of things. They’re wearing a lot of different hats.
Steve Carroll: I think at that size of a company or sometime shortly thereafter, it’s important to invest in real finance. Tyler, you’ll probably appreciate that.
Tyler Martin: But I didn’t set you up, I swear.
Steve Carroll: You didn’t. But I do believe having the right numbers is really, really important. pretty early in any business. And you may think you’re good based on how much cash you have in your bank account, or you may think you’re bad based on how much cash you have in your bank
Steve Carroll: account. But that’s not the real story. If you don’t understand what is your networking capital situation? What is your true whip that you’re sitting on, depending on what business you’re in? But understanding what your future cash flow is going to look like and all those things is just
Steve Carroll: near impossible for a business of that size unless you’re investing in finance the right way. And that’s something you can build upon. Learned that early in Kelso, but also at Walmart too. We had weekly, daily updates. I mean, we were literally going through our numbers constantly.
Steve Carroll: Sam Walton impressed that upon that organization. And it just, it changes things when you have data
Tyler Martin: of that fast. Would you say when you were doing the scaling within Walmart, were there any processes or systems that you created that stand out that allowed you to have such rapid growth?
Steve Carroll: Absolutely. I mean, the urgency to me was the biggest thing and thinking big. But right after that, you’ve got to have people and you’ve got to have processes. And so we dreamed big. We put big goals out there. And then we had to go develop a plan to actually go do it. And that involves
Steve Carroll: leverage operationally with people or leverage financially. And we found some amazing people to buy in to what we were trying to do at Walmart. We’ve done the same thing with Kelso. We’ve created a grand vision and we’ve found amazing people. And as we’ve gotten bigger, we’ve gotten
Steve Carroll: better. And we’ve been able to, we’ve been able to bring on more folks, even folks with amazing talent, as we’ve gotten bigger that I always tell them, I love you guys. Thank you for being here,
Tyler Martin: but you wouldn’t want to be with me three years ago. Which I want to get into that before I do, just so people could connect that are out in the audience. And, you know, typically my listener is going to be somewhere in that one to $10 million revenue range. When I hear you say, think big,
Tyler Martin: willing to take risks. That’s easier, I think, if you’re like a Walmart perspective to kind of think that way. What would you say to me, though, in me thinking that way? Am I thinking too small
10:22Thinking big without being irrational at five to ten million
Tyler Martin: myself when I’m comparing it to small businesses? Or what does that mean? Should we as a small business be thinking, yeah, think big and have no guardrails? I mean, how do you equate that
Steve Carroll: so that we can all connect at a smaller level? Well, I mean, thinking big is relative to your current environment, I believe. And I believe you should have a very big vision of what you could achieve. But you should also have a one-year vision and a three-year vision.
Steve Carroll: And the very big vision of what you’re trying to achieve, it should stretch you. It should cause you to feel a little bit uncomfortable. But if you play that back a few years, maybe your big vision is a 10-year goal. Maybe it’s a five-year goal. But you should play that
Steve Carroll: back to your current situation and put a realistic plan over the next one year that you feel is financially reasonable for your situation. I’m not suggesting anyone should do anything irrational, but I do encourage people to think outside of the box because a $5 million per year
Steve Carroll: business might say it’s impossible to get to 10 million, but I promise you somebody has. going from five to 10 is very hard though. How do you do it? That’s going to be totally specific to you with your people and your processes and your investments. But I guarantee if you’re
Steve Carroll: running a $5 million business, somebody’s figured out how to get it to 10. If you believe in your long-term vision, you’re going to, you’re not going to sleep day or night until you’ve figured out how to develop a plan to get yourself from five to 10. That might take three years. It might
Steve Carroll: take five years. Might take one year, depends on what you’re doing. Maybe you’re one customer away, maybe you’re an acquisition away, maybe you’re a hire away. But if you’re moving in that direction, you’ll eventually achieve your goals. And over time, your wins will stack on top of each other.
Tyler Martin: Yeah. It’s one of my funnest questions when I’m talking with a particularly new client, is what are their goals? And you learn so much. Most clients are pretty conservative in terms of their goals. But it reminds me of a guy I interviewed, John Wilson. He runs Wilson Companies.
Tyler Martin: And when I interviewed him, I had done research on him and he said he’s a $30 million company. His next goal is to be a $100 million company. But I think he’s updated his goal because when I interviewed him, he’s like, $100 million seems small now. He’s like talking a billion-dollar
Tyler Martin: valuation. So it’s just funny how some people, I think, are programmed or they let themselves think outside the box where it’s almost limitless in terms of what they can do. And I think a lot of us. And maybe to some degree, I’m in this group, I’m a little more conservative in my goals.
Steve Carroll: And I think sometimes it holds you back. Yeah, 100%. 100%. And you can’t only be doing visionary work all the time. You’ve got to actually go out there and execute. And I’ve been really blessed to have a lot of people that are willing to execute on our vision. And
Steve Carroll: early on, a few years ago, probably a good three years ago, I put out there that we would grow Kelso to a billion dollars of revenue. And pretty much everybody was like, I like working with you or I like partnering with you, but that seems kind of crazy. And I can report now as of a few
Steve Carroll: months ago in the last trailing 12 months, we have crossed a billion in less than five years from when we started. So I believe outrageous goals can be accomplished, but you’re never going to accomplish the goal if you don’t at least put a goal out there to work towards.
Tyler Martin: Yeah, that’s a good one. Hey, it hasn’t always been though, sunshine and roses. When you first started out, it was during COVID and it wasn’t the greatest experience. In fact, I think you
14:07The first Phoenix HVAC deal that nearly ran out of cash
Tyler Martin: were almost on the verge of bankruptcy. Can we talk through that first acquisition?
Steve Carroll: Yeah. Yeah. So I have a degree in construction management. I worked for general contractors. I worked with my hands on asphalt crews. I grew up on a farm. I knew how to work with my hands, but I also wasn’t an expert in HVAC.
Steve Carroll: And so I had a lot to learn. The first business we acquired was a light commercial HVAC business in Phoenix. And it was a good-sized business. It was a little bit of a stretch for us to start with that business. but it was good because we had some infrastructure, we had some team, we had some processes.
Steve Carroll: Some of those things were outdated, a lot of paper, notebooks, stuff like that, which we know is a little hard to scale with and manage at bigger numbers, but it was a really good place to start. I started learning how to estimate by coloring blueprints and counting and putting
Steve Carroll: prices to diffusers and counting rooftop units and putting prices to all those things and lineal footage of duct work. And I really got my hands into the weeds of operating this business. And we were new to this industry and we didn’t quite understand the pitfalls.
Steve Carroll: And a lot of the pitfalls are related to finance and cash. And at one point, we thought we were the smartest operators in the world because we had a whole bunch of cash. And not that long later, we thought we were the dumbest operators in the world because we were out of cash and very worried
Steve Carroll: about our survival. Again, at that time, we didn’t understand how WIPs worked. We didn’t understand how cash forecasting worked. And we got into trouble for sure. So taking from that experience,
Tyler Martin: What would be your number one piece of advice? Company has a cash crunch. What do they do?
16:14His order of moves in a cash crunch, starting with AR
Tyler Martin: Like what would be your number one recommendation they should be doing?
Steve Carroll: Well, if you’re in a very major cash crunch, I think there’s probably a process you’re going to have to go through to beef up your cash position. And first thing is look at your AR and figure out where you’ve got AR hanging out there.
Steve Carroll: Get on the phone, call your customers, tell them you need to be paid now. You’re past the contracted allowable period of time and you need to be paid, go sit in their office. In fact, I went and sat in multiple offices of our customers and I needed that payment.
Steve Carroll: You know, past the allowable time, it’s my money and I need it to survive. And oftentimes clients don’t realize that is the means of survival for some of us. Secondly, I would look at your vendors. Not the most enjoyable thing to be said, but hey, some vendors you’re paying too fast and some vendors, they may need to partner with you for survival.
Steve Carroll: Thirdly, I would look at your inventory. Maybe you’ve got too much inventory. Maybe you need to go to your vendors and develop a sort of just-in-time delivery methodology so it improves your cash position. And then the last thing I would go work with your capital source, your bank, and develop
Steve Carroll: a plan, develop a plan with them. But all along the way, this is really hard to do if your numbers are not right. It’s darn near impossible if you don’t even really know your numbers. If you don’t really know your WIP, if you don’t know that your jobs are losing money,
Steve Carroll: if you don’t know if your jobs are making money, you got to figure that all out because that feeds your AR, your AP. Maybe you need to work on over billings. Maybe you need to work on managing your job so you don’t get behind on under billings. There’s a bunch of levers
Steve Carroll: you may need to pull depending on what industry you’re in. But again, if your numbers are not right, if you haven’t invested in finance, good luck to you. It’s going to be a hard journey. And we learned that early on. And it was a struggle. That was probably one of the biggest
Tyler Martin: reasons why we got into trouble. I mean, how much of a struggle? Were you literally at the point like, hey, we may have to close our doors? Or did you always know you had some level outside
18:34Protecting payroll so you don’t lose the team
Steve Carroll: capital that was accessible? In our industry, the thing that can go wrong is you run out of cash to do payroll. We have to do payroll every single week. And even if you think you’ve got some sort a capital source or whatever, if you miss a payroll, word spreads, it’s really hard to retain
Steve Carroll: talent. You’re going to maybe try to win work, but it’s going to be hard to get the work done because you just lost your team. There’s ways to make it work still if you had to. But for me, that was the biggest factor is I need to keep our company. And if I lose my people, it almost
Steve Carroll: doesn’t matter what capital is out there. I’d have tons of capital. It could have been pulled at any time if they thought we were going to have to close the doors. We had some capital, but it goes away quick if they think you’re running a sinking ship.
Tyler Martin: Yeah. I do want to echo WIP for those that have it in their business model. You can hide a lot in that if you’re not tracking it. So I’m with you there. That’s a scary one. And sadly, a lot of small businesses don’t have the expertise really a lot of times to track that accurately.
Tyler Martin: And then the other one would be job costing. That’s the one that always blows my mind is it’s all kind of by gut feel. And a lot of times when we think of numbers from a gut feel, it is so dramatically different than actual numbers, the actual data. And those are two
Tyler Martin: areas that you can just blow through a ton of money and cash and quickly get to the end of the
Steve Carroll: road. Absolutely agree. If you’re not job costing, that is a major no-no. I don’t know how you’re even still in business. To a couple million dollars revenue, you can probably make it work, but shortly thereafter, plan a fire if you don’t have job costing and a regular WIP process.
Tyler Martin: Yeah. One last question in this area of this difficult first acquisition. How did you keep employees and customers feeling comfortable, assuming they knew, maybe they never knew on the outside, but did you do anything specific just to keep everybody comfortable as you were
Steve Carroll: kind of going through a tough time? I think you, you got to just continue to show your commitment and show up every day, answer the phone, deal with difficult issues when they come up, be the one to go do the work. If it’s at that point, show up, be present, be supportive,
Steve Carroll: answer questions. It’s hard for somebody to totally give up on you if you’re not giving up on yourself. And for me, that was just not an option. I was never going to give up. So it was a fight. It was a fight to the end for me. And that matters. I would say in business,
Steve Carroll: a great deal because people know and can tell and believe in a fighter, they can sense it.
Tyler Martin: And that’d be my biggest piece of advice. Yeah, it’s leadership. I mean, And if it’s a leader they’re following, they want to see them be a leader. And it sounds like you were saying, hey, we’re stepping up, we’re owning it, and we’re doing what it takes.
Steve Carroll: Yeah, exactly. I would say that is probably the most important thing to grow as well. If we’re off on vacation all the time or if we’re taking breaks all the time or not responding to things quickly, not solving problems, eventually people are going to lose trust in one you know in the growth plan or in in a turnaround
Steve Carroll: plan so to me being present be responsive if people text me or call me i get it back to them the same day if it’s someone from my team or a customer or a vendor i’m very very responsive obviously sales people that’s a whole different thing too many sales spam calls but stuff that i
Steve Carroll: need for the core of the business, I’m super responsive and I always have been. And that goes back to my Walmart days. That was a cute Sam Walton tenant that I will never give up on. So I think that’s a big deal. You’re even pretty responsive to the guys pestering you about being
Tyler Martin: on a podcast. Not naming any names. Yeah, that’s fair. Hey, so just shifting gears here. So you went through this crisis situation, came out smelling fine. Obviously, you’re on to 28 acquisitions
23:00Partnering with a childhood friend and staying in your lane
Tyler Martin: now. You picked a partner that was a special partner and that he was a childhood friend. And I want to talk through that a little bit. How do you deal with someone that’s so close, a childhood friend you’ve been with for many years? How do you guys deal with disagreements
Tyler Martin: or kind of when there’s not alignment in terms of you two and your vision? Or are you guys always
Steve Carroll: on the same page. Yeah. I mean, we are, we’re different humans. We have, we have a lot of the same foundation. We were even, we were even roommates in college. So we, we did learn how to resolve issues that date all the way back to fourth grade, you know, all the way into college.
Steve Carroll: In some ways we’ve, we’ve been very lucky. I think we both have a mutual respect for each other. That probably is one of the biggest factors. If you don’t have mutual respect, it’s probably hard for this to work. We, I think, learned how to resolve some business communication with each
Steve Carroll: other. And we’ve also just been students of this industry. We’ve been students of how, you know, interpersonal communication skills. We’ve just been students of, we’re going to figure this out no matter what. And nothing’s ever going to stop us. And I think when you have that mindset
Steve Carroll: and you know someone for so long, when they say something dumb, you still love them. And you still, and you say, I get why he said that. Or when I say something dumb, he says the same about me. And we both were able to move past anything that would come up so fast
Steve Carroll: because we’ll bring it up so fast or we’ll work through it so fast. It’s like, okay, we have the same long-term goals. And there’s not going to be a little thing, an ego thing here or there. I’m not saying that it doesn’t happen every now and then,
Steve Carroll: but we work through it so fast that it’s like, I’m not going to stop on that issue. We’re working past. We have this long-term goal. Why would I let this little issue get in the way of that?
Tyler Martin: Sure. Do you guys have a certain level where you’re kind of in your lane and he might be in his lane? And that is part of how things work smoothly too?
Steve Carroll: Absolutely. I have a totally different career level of experience and leadership experience than he does. And I’d say that’s probably the biggest thing is very little overlap. He’s the finance, capital, PE expert. I’m the leadership operations, people, you know, the people side of the business expert.
Steve Carroll: And not an expert, but that’s where I focus. And I love that side of the business and he loves his side of the business. And so together, we’re able to operate at a level that I think is pretty unique.
Tyler Martin: Yeah. What would you say to someone that was considering going into business with a friend? Would you recommend that? Would you say, hey, consider these things? What would be your thoughts around that?
Steve Carroll: I would learn how you communicate through conflict before you ever even sign anything together. And if you can work through conflict, that’s a big win. But shortly thereafter, I would say if you’re both willing to solve conflicts, you better partner with somebody that has complementary skills.
Steve Carroll: Because if you’re missing a whole bunch of skills between the two of you that are necessary for the future goals you’ve got, then you got to go find somebody else. And if it’s core to your strategy, then you’re stepping all over each other as partners. You’re stepping over each
Steve Carroll: other’s toes all the time. We developed a roles and responsibilities document recently that we use for our executive team. But as I wrote that out and I drafted it, it was really cool because I put a draft version for him and for me, and we went back and forth on it for a little
Steve Carroll: bit and it was like, this is what we’ve been doing for years. And we didn’t even have it in a document. We just knew these are the areas that we were to both focus on. So that worked out well for us. But I think if you’re thinking about a new partner after you’ve learned how to solve
Steve Carroll: conflict, you better figure out a roles and responsibilities matrix very quickly.
Tyler Martin: Yeah. I know you guys have played kind of like a good Steve, bad Steve type role. Can you talk about that a little bit?
Steve Carroll: Yeah. A few years ago, we had our first president’s meeting and it was really funny because somebody raised their hand and I forget the context why, but somebody raised their hand and said, oh, bad Steve said this and good Steve said that. Now we were like, oh, what is that?
Steve Carroll: And they said, oh, yeah, Steve Carroll’s, they called it good Steve. And Steve Nicholson’s bad Steve because he’s, you know, that was part of our journey and our negotiations. And I was probably a quicker yes. And he was a quicker no during certain things.
Tyler Martin: It’s always the finance guy is the bad guy. That’s funny.
Steve Carroll: But yeah, that’s true. We needed that discipline. And so I thank him all the time. And now some of our presidents have said he’s the smart Steve. So I’ll give him a lot of credit for being very smart, even though I might be willing to say no or be the bad Steve.
Tyler Martin: Hey, so I want to shift gears here a little bit. You guys aren’t doing necessarily anything unique in terms of private equity. But I’ve also, in my research about, you know, you’ve said, hey, PE usually does this wrong. They usually hurt value of the companies they’re acquiring.
Tyler Martin: Let’s talk about the contrast of what you guys are doing a little bit differently. than maybe what other PEs commonly do.
Steve Carroll: Yeah, I don’t mean to say that PE hurts companies’ value because that’s a very broad statement. But sometimes PE can focus on the dollars too much or focus on the financials too much. And so when we were early crafting our strategy for Kelso,
Steve Carroll: it was helpful because I came from the industry. I have a degree in construction management. I’ve worked with mechanical electrical plumbing companies for many years. And we were able to bring to us what I feel is a bit of our competitive advantage with our strategy and the way we go to market, what markets we go after. It’s MEP,
Steve Carroll: but we have a special approach that I think sets us apart. And we tailored our capital around it. We tailored our M&A strategy around it. We tailored our operating strategy around it. And I think if you tailor your business around your financial strategy, you can miss the
Steve Carroll: opportunity. And we were able to leverage some insights that took probably a number of years for me to realize that makes us a little bit different in that way. And we try to carry that forward with our partnership model now because those folks know as well their boots on the ground. They’ve been dealing with this stuff. And when we talk about our strategy, we always get a resounding, yeah, we believe in that. That’s great. I think that’s a big reason of why people have come to join us.
Steve Carroll: were blue collar guys, farmers from Oregon in construction and service businesses. Now I’ll never be as good of a welder as majority of our employees or an electrician as good as our employees, but I, I can commiserate with what they’re doing and appreciate what they’re doing
Steve Carroll: and also commiserate with our clients and what they’re actually trying to solve with their budgets and our capex dollars and over the long haul we feel like we’re building the pieces that
Tyler Martin: solve the puzzle for both both sides can you give me an example of where numbers didn’t necessarily
31:24The Kelso flywheel and why owners buy stock instead of exiting
Tyler Martin: drive the acquisition where let’s say like a traditional p might have it was all driven by numbers where you guys are what are you doing that’s looking at it a little bit differently
Steve Carroll: Yeah, so we developed the Kelso Flywheel. And the Kelso Flywheel involves all elements of the life cycle of a building. Buildings get built, buildings are maintained, buildings are retrofitted, and then they’re knocked over and built again. That’s the life cycle of a building.
Steve Carroll: And we feel uniquely focused on the full life cycle, whether it’s mechanical, electrical, or plumbing. And we’re not afraid to be a part of the full life cycle. And we think it’s our competitive advantage being in the full life cycle. A lot of the financial world is, you say anything to do with construction or installation,
Steve Carroll: They’re very concerned or worried about it. We think that’s, to us, that’s the greatest opportunity. We are not afraid of overbillings and WIP and contingencies and managing escrows and the very scary elements of construction. We’ve earned our stripes, we feel, and we focus on that.
Steve Carroll: We know it’s a risky part of our business, but we’re looking for companies that include that as part of their business because that’s an incredible opportunity to meet the building owner and offer the other part of the Kelso flywheel, the service, the maintenance, and the retrofit work that that building owner is going to need over the next 30 years is us.
Steve Carroll: We’ll do all of it for them and we’ll bring all the resources to the table. And then when that owner wants to go build another building, we’re experts in that too. We know how to schedule. We know how to labor forecast. We know how to price and deal with large-scale vendors.
Steve Carroll: And over time, we feel like that’s just a unique approach to our industry because a lot of private equity is scared of managing something like that. And to us, that’s the opportunity.
Tyler Martin: How much of that did your focus on MEP+, did that evolve from that first acquisition and you kind of had the cash flow problems, you had to get your arm around WIP? Did some of it evolve out of that where you said, wow, now we’ve gotten to know this really well?
Tyler Martin: Did that help create that space or are they totally independent?
Steve Carroll: Yeah, it was all part of the process. I knew from my days in construction, I knew we were going to eventually build an MEP plus type of business. In fact, my partners like to joke, they don’t remember this, but I remember dearly when we were trying to figure out the name of our company.
Steve Carroll: And the question was, why don’t you call it Kelso Heating and Cooling or Kelso HVAC or Kelso mechanical or something like that. And that’s, I was like, no, we’re not, we’re not doing that. We’re not just a mechanical business. We might look like a mechanical business today,
Steve Carroll: but that’s not where we’re going. And that’s, that’s why you can see over my head, this sign here, it says industries, Kelso industries. And we were very deliberate on that very early on. We didn’t add electrical for a few years, but we knew we had to focus on
Steve Carroll: mechanical and learn the basics and get our process solid to where we could fully execute and go towards that long-term vision. But it started with that one business and we learned
Tyler Martin: the basics and then we grew from there. Got it. So going from that topic of your guys’ is just PE firm mistakes and your own focus, looking at the businesses that you actually buy. I want to talk a little bit about your approaches rather than buying out is the partnership. Talk
Tyler Martin: a little bit about what you’re looking for, like what your model is and why it necessarily works.
Steve Carroll: Well, this goes back to when we first started, we acquired a business and the owners left within like two weeks. And we probably could have kept them around for a little bit longer, but it’s tough. The owners sell, they want to go sit on the beach. They want to enjoy the fruits of
Steve Carroll: their labors. And we didn’t structure the deal to where they were incentivized to stick around. There was no reason for them to stick around. And that was on us. And so we had a steep learning curve. And that plays into a lot of the challenges we had at that business. Whereas in addition to
Steve Carroll: that, we wanted to grow. And I think a lot of the business owners that are listening to this right now, I’m sure are realizing, man, it’s hard to, once you get to 10, 15, 20 million, you’re for your team a little bit. It’s really scary and hard to grow beyond that because you’re probably
Steve Carroll: working a lot if you want to grow. And somebody quits and then you have to do their job. It’s really hard. So I was working 100 plus hours a week just trying to survive. And my partner, Steve Nicholson, would constantly show up. He lives in Utah.
Steve Carroll: I moved to Arizona to run this business. He would show up and we’d discuss how can we make another acquisition. And I would just be like, dude, I am tapped, man. I can’t do another. We’re barely making it work right now. how could I possibly run another business that we acquire? And we were looking at stuff in Texas
Steve Carroll: and California and Utah. And I would travel around sometimes and just be like, this looks great, but like this person wants to retire. And I don’t know. I don’t know how it survives with us. I don’t know. And that was the early stages of Kelso and why we didn’t get any acquisitions done for a
Steve Carroll: year after we started. And I was learning the business hands-on, dealing with every little issue that might come up, customer-related, vendor-related, employee-related, office-related, cash-related, and I just didn’t have time. So when we, and I’ll give Steve a lot of the credit, he planted the idea for me to think about with partnership and how private equity uses partnership.
Steve Carroll: and when you talk about partnership from an equity standpoint. And we were able to meet somebody up in Idaho. He’s our partner to this day, but we met him up in Idaho. And I remember flying up to meet him after talking with him a number of times and saying,
Steve Carroll: look, this is what we’re trying to do. I wouldn’t be able to come up here and run this business. We want to buy you out. What do you think? And he’s like, well, I don’t want to sell. I don’t want to go sit on my couch.
Steve Carroll: That doesn’t sound very fun. I’m young. I’m hungry. I’m excited. This is, you know, his team was, is his family. And that’s where we had the idea of, well, why don’t you sell us your business? But you’re a big chunk of the value of your business.
Steve Carroll: You buy Kelso stock with us and you partner with us. And I remember when we said that to him, he looked over, he’s in his truck. He looked over and said, I’ll do it. And that’s when we were like, maybe we’re onto something here.
Steve Carroll: See how this goes. And it’s turned out great. He’s continued to be an amazing partner. He works really hard. He’s an amazing partner. And that’s how we realized, man, if we can find partners that actually don’t want to just leave, they’ve been investing in this. They put their
Steve Carroll: heart and soul into this business. They believe they could do more if they had capital and partners to take this business to the next level. They just need a little bit of support, whether that’s financial, HR, bonding, prequal support, or relationships from customers, or
Steve Carroll: confidence to make some specific hiring investments, or different things. We realized over time that Kelso can bring that value. And we focus solely and exclusively on that now. We look at every deal with the lens of, is this a potential partner? And we celebrate
Steve Carroll: new partners. We’re excited about it. We’re about to have our next president’s meeting. I forget how many it’s been now. We try to do them twice a year and we’re going to have a lot of people there. And it’s really exciting because we’ve got partners all over the country that are financially,
Steve Carroll: emotionally, spiritually bought in to what they joined. And there’s a lot of people counting on each of them to survive and succeed and thrive because we’re partners. We’ve chosen to be together. We have core values. Partnerships are first core value. And so we celebrate the
Steve Carroll: partnership. We think it’s unique to us, unique to our industry. We’ll partner with someone that wants to retire, but there needs to be someone within that organization that will be our partner financially, spiritually, and emotionally. And that’s worked. That’s worked very well for us.
Tyler Martin: So let’s say that’s a general manager. Are they, how do you get their buy-in if they’re not currently an owner? Do they get to buy in some stock or what keeps them retained?
Steve Carroll: Yeah, we work with the owner to figure that out.
Tyler Martin: Okay.
Steve Carroll: The owner’s our partner too. And the owner might want to have a plan to retire. We usually like to have some time though.
Tyler Martin: Sure.
Steve Carroll: And it’s going to be specific to each person and to each company. And there’s not been many instances where we’ve partnered with someone and they were gone even within months. It’s usually years. And so it’s a partnership approach. It’s what’s the right thing to do?
Steve Carroll: How do we do this? Who is it? What’s the future look like? How do we give that person an opportunity to succeed? We want them to succeed. What does that take? and it can take many different forms. But we believe as partners, you’re going to find the best solution
Steve Carroll: if you take that approach.
Tyler Martin: What would you say someone that’s thinking about selling their company or in the future they’d like to, what are things that they should be doing that makes their business attractive, whether it just be a solo buyer or a firm like yours?
Steve Carroll: I think the best thing you can do is make your business appear to be repeatable and scalable. And repeatable and scalable is a complex answer, but it involves organized investment all throughout your business. You need to have the numbers to prove that you’re repeatable and scalable. You need to have the team that is
Steve Carroll: repeatable and scalable. You need to have the customers, the customer contracts that prove you’re repeatable and scalable. You need to have the processes that prove that you’re repeatable and scalable. If you don’t have any of that, it’s hard to sell and it’s hard to put a value on your
Steve Carroll: business. You can look at the EBITDA and those kinds of things, but it’s hard to understand if that EBITDA is going to be there without you. If you don’t have those things solved for, build a finance process and team use use a scalable software solution that
Steve Carroll: you can pull reports from we can quickly look at your ar we can quickly look at your backlog your whip your forecast based on your your customer base repeatable and scalable is what i would focus
Tyler Martin: on i’m assuming that ebitda is what drives most of the value though is that a fair statement yes Okay. And so I think what the other component of this is upside in terms of the foundation or processes and systems they have set up seems to be the other area that you guys are putting a lot of emphasis on. Like, in other words, how can we take it to the next level? And is there a foundation to be able to do that?
Steve Carroll: Yeah, I mean, a business can be sold if it’s got solid amounts of EBITDA. But if it’s one job that you’ll never get again, or a client, one client that you might lose tomorrow, it’s kind of hard to figure out how much to pay for that business.
Steve Carroll: So are you maximizing value? Maybe for your cash flow, when you don’t optimize that part of your business, but when you’re trying to sell, it is hard to figure out what the value of a business is, or even if it’s even sellable, if it’s just one customer and or one project.
Steve Carroll: You got to go to the farther end of the spectrum as much as possible to maximize the value of your business in that scenario.
Tyler Martin: Good stuff, good stuff. Okay, so we’ve talked about, your Walmart playbook, near bankruptcy, I’ll call it. Maybe that’s a little bit dramatic, but you guys were dealing with a challenge there with that first acquisition. Childhood friendship, building businesses around a childhood friendship, which is awesome. Calling out, I guess I’ll call
Tyler Martin: it calling out PE, but I don’t know if that might be a little bit of strong, but just having your own formula in terms of the way you’re working your business. And then I would say reinventing partnerships. I love the way you guys are looking for someone that kind of can see the bigger
Tyler Martin: picture. It’s more than just getting out of the business, although you would be open to that if there’s another individual that could step into that role. But it sounds like in a perfect world, if you could find an owner that sees the bigger picture, they want to get to the next level,
Tyler Martin: maybe they’re kind of worn out from just having to do it all on their own. And they see a partner that obviously trust comes first. That’s the most important ingredient. And then after that, it’s like, well, they also have all these resources that can help us fight through that
Tyler Martin: without me having to do it a one-man army or one woman army. I’ve got a whole team now. So I think we covered a lot of material. Did I leave anything out or anything you want to close
Steve Carroll: on? No, that was great. Good conversation. I did want to reiterate, I don’t have a beef with private equity. Private equity, to me, is a tool. If you have a goal, think of it as a tool. Is the tool bad? No, of course not. It’s how you use the tool. And I love private equity. The
Steve Carroll: the partners that we have that have partnered with us, we’d never be where we’re at without them. They’ve been amazing partners to us and amazing tools to our success.
Tyler Martin: Yeah, and that was all my research and me driving, probably putting the spin on it on my own. So I apologize. Definitely don’t want to put words in your mouth. So that was an awesome conversation. In terms of links, Steve, I’ve got kelso-industries.com
Tyler Martin: for where your business website is at. And then your LinkedIn is Stephen H. Carroll, two R’s and two L’s for your LinkedIn. Anywhere else if people want to reach out to you is LinkedIn the best spot?
Steve Carroll: LinkedIn is great. I’m pretty much always connected on LinkedIn, asked to connect with me. And if you want to catch up, send me a message.
Tyler Martin: Awesome. Thanks, Steve, for your time. Super appreciate it. And thanks for all the wisdom you shared today.
Steve Carroll: You bet. Thanks for your time.
Tyler Martin: what i loved about this talk with steve is how real it was every shop owner hits that moment where cash gets tight and the easy move is panic steve didn’t he slowed down he focused on what mattered most protect payroll collect faster manage whip and build real visibility into the
Tyler Martin: numbers. The bigger takeaway is this. Your ability to scale depends on how well you understand your cash cycle. If you can see where the money’s going, you can lead through any storm. That’s exactly what I help business owners do. Turn chaos into a plan they can run confidently.
Tyler Martin: If your business feels like it’s growing faster than your numbers, that’s a sign to get ahead of it. Be sure to book an intro meeting with me. This is a no pressure. First call, get to know each other, see if potentially I can help you. Book it at cfointrocall.com, cfointrocall.com, or visit
Tyler Martin: cfomadeeasy.com. If you want to learn more about how I can help you and your business, go ahead and book that meeting. I’m Tyler Martin. This is Profit and Grit. Remember, grit’s the spark, profit’s the mark. See you next time.
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Tyler Martin works with owners on the numbers behind these stories: home services accountant and fractional CFO for home service contractors.
