Entry & Exit #67 Is Private Equity Ruining Small Businesses?

Is private equity destroying small businesses, or creating new opportunities for growth?

In this episode of Entry & Exit, Stephen Olmon and Collin Trimble break down the impact of private equity on small businesses, particularly in the security and home service industries.

They explore what happens when private equity firms acquire established businesses, why some acquisitions lead to layoffs and declining company culture, and how the right investment partners can help business owners scale while protecting their employees and customers.

Plus, Stephen and Collin discuss the different types of equity investors, the risks of selling your business, and what Thrive Capital's involvement with ADT could mean for the future of AI, automation, and private equity in service businesses.

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WHAT YOU'LL LEARN:

• Private Equity Acquisitions: How institutional investors acquire, consolidate, and grow service businesses.
• Business Culture & Employees: Why some acquisitions lead to layoffs, employee turnover, and declining customer experiences.
• Selling Your Business: How to evaluate potential investors, understand ownership control, and choose the right investment partner.
• Alternative Investment Models: The differences between private equity firms, family offices, employee ownership, and growth capital.
• AI & the Future of Acquisitions: How the ADT and Thrive Capital deal could reshape technology and operations in the security industry.

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CONNECT WITH ENTRY & EXIT:

Website & Newsletter: https://entryandexit.co

Stephen Olmon: https://x.com/stephenolmon

Collin Trimble: https://x.com/TXAlarmGuy

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Is private equity ruining small businesses across America?

Technically, anytime you're taking money from outside people that's not debt, that's getting private equity.

Taking money from friends and family can be very messy. Uh that is not only good. That can ruin some Thanksgivings real quick.

When a private equity group gets involved into a business, where it gets bad is when they mess with the customer experience and the employee experience. But sometimes it can be confused with, oh man, a lot of employees left. Maybe they left because they were used to running a mom and pop lifestyle business where they had basically unlimited rates to do whatever they wanted to do, show up late, leave early, take as much vacation, and it's gonna be really interesting to see how many people jump into the service-based world.

Bada ba ba. I'm loving it. I'm loving this podcast. Ba-da-pa-pa-pa. I'm loving it. I'm loving this podcast. Is that the right jingle? I hope it is. My name's Steven, and I also have my partner and closest, most intimate confidant and podcast co-host um with me, Colin Trimble. So great, looking great, great. If if you're not watching the video, you should come check us out on YouTube because his beard today is really giving a lot. Um, today we're talking about is private equity ruining small businesses across America.

And yeah, can't wait for our producers to give us like the most like perfect clickbait thumbnail for this for all of our listeners. I hope it's really good.

I can't wait to want like dollar signs in the eyeballs, no, like Bitcoin eyes, like the red Bitcoin eyes with like dollar signs coming out our tongue. Here, I'll do a still. Yeah. Maybe that. Um, that'd be cool. The reality is, is it's your favorite answer of all time. It depends. Yeah. And there are before we started recording this, we were having you know kind of a pre-call because we're strategic and we plan ahead. Super strategic. There are different types of private equity, there's different types of equity investors. I think it really depends on who people partner with in terms of what their experience is going to be, what happens to their team down the line. We've had some really sad conversations with people. I mean, we just had one in the office a month ago with somebody that was sharing kind of a pretty bummer of a story of what you know happened to his team post-close.

So um Yeah, and this is not specific also to the security industry. This is really just generally speaking, I would say in the service-based industry, the blue-collar world, if you will, is private equity ruining those businesses?

Um, and I think you know, one thing we need to really just just define for a second. Technically, anytime you're taking money from outside people that's not debt, that's getting private equity. If you take money from your mom, that's technically private equity. If you take money from a group of buddies, if you take money from a family office, if you take money from a growth equity company, if you take money from a large institutional private equity company, all of those are private equity dollars. I think what most people are referring to is just the institutional PE companies that we see. That that like the latest one is the ADT deal that just uh Thrive Got Purchase ADT. That's a traditional private equity institution taking a stake in the business. Um, I would not I would classify anything below that is not really what we're talking about here. Um, and so the the real question is is institutional private equity destroying the small business world? And yeah, I mean the answer is sometimes, right? I mean, it just depends, right? I we have had conversations with tons of people across multiple industries who have had horror stories, and we've heard great stories of great partnerships. And I think it depends on what is the long-term goal of the private equity company. And, you know, I would just say, like, and I would say this to my friend too that did a deal if you are surprised by what the institutional private equity company is doing, then you didn't vet them hard enough, and you probably got dollar signs whenever you were going through

the deal. Because they're every institutional private equity company, there's really bad actors, but generally speaking, they're pretty upfront about what their long-term goals are in the business and what they want to do. And one play, this is not every private equity company, but one play that is very well known is come in, buy an existing platform or several platforms throughout a geographic area, do as many add-ons within that geography that you have a platform that you can possibly do, grow organically just enough to cover any attrition that you are doing that year. So stay flat and gobble up as many as you can, fire as many employees as you can to cut overhead, get as many things into a shared office as you can, and then sell the business for some multiple of arbitrage to a larger buyer. That is what people traditionally think of as a private equity move. Um, but that's not what it is every time. And I do think we should talk about that and spend some time on that. I think that it's pretty easy to say, yeah, if you're if you're, you know, if there's a private equity group that's out there and their goal is to roll it up and sell it in six years and they're firing all the people and destroying brand names that have been around for 40 years, yeah, I would say that's probably ruining a business culture. Uh, but there are a lot of institutional private equity groups that are not doing that um and are not interested in that and take a longer-term view and are in it for the long haul. They have more permanent capital style outlook. And I think that those those companies can be great. I mean, I think they could be good.

Um You know, what is ruining a small business? You know, ruining for a lot of people is just you ruin the culture. Yeah. So these larger firms come in and and if they are, you know, applying cost cutting measures that are like pretty steep, aggressive cost cutting, then that means a lot of people are gonna go out the door, which can have uh a bit of a um kind of uh cascading effect where people leave because they think that they're next. And so, you know, our friend recently said, Hey, it's it's been less than two years and there's like two of my original team members left. Basically, everyone's gone because they either proactively left or they got canned. Yeah. So that is one type of you know ruining the business. Also, I think there's businesses that have a certain go-to-market strategy, and private equity comes in and says, We know how to do this better, or we've done something in an adjacent industry that worked really well, we're gonna slap that on top of your model, kind of ruins the business from an economics perspective because it wasn't really built to do that, or in that market, you know, maybe it was just kind of broad strokes applied, and that's actually not what's gonna win in that local market. Um, there's just different ways that small businesses get quote unquote ruined. Um, but I think a lot of it typically comes down to culture and longevity and tenure of team member, and so you just turn it into kind of financial engineering, and that's what really gets a bad name. But uh to your point, uh family offices often are much more patient capital or even potentially evergreen.

They want to come in and back a team, uh, or maybe they want to buy a controlling interest. Like traditionally, family offices have been more like uh investors in funds that are doing this type of activity. Over the last five, ten years, you see a lot more direct investing by family offices where they want to take controlling stakes or take it down altogether in operating companies of scale. And so a lot of times those end up being really healthy outcomes where they're not coming in trying to cut costs, they might even be in putting parking money on the balance sheet to like invest more deeply into the business. So that that can be a really good alternative. Um, you know, there's also um you know, like uh Esops, like an employee-owned business, technically, that is uh a different way of selling a business. Um that can be much more kind of long-term and like for the people by the people, which is cool. Um, if you've ever participated in ASOP, those can also be really messy. Um, so um if you ever hear that word, um, you know, I think do your do your homework. But um then you have like friends and family. That's almost I think of that like starting a business, or maybe it's a stopgap, like you're struggling and you take money. That can also, I will say, taking money from friends and family can be very messy. Uh that is not only good. You know, there's yeah, there are definitely versions of that that are really hard because when you have to look friends and family in the face and say, hey, we're failing even after you took an investment, and you know, that's a real thing that happens. That can ruin some Thanksgivings real quick. Yeah. So um, I I don't think that it is uh I think kind of speaking in absolutes is not the right thing here, but it is one um who am I taking money from and why? Yeah, what is their intention? Let's be honest, eyes wide open. And if it goes really bad, what does that mean for me in my experience? You know, so that's that's another part of the thing.

Well, I think the other thing that needs to be defined is is the equity you're taking gonna render you with losing controlling interest in your business? Um, right? So these these businesses that accept growth capital or whatever, they're not giving up control of their business. And so you have to kind of think about what is the control dynamics that have to do with the private equity group. But man, I'll just say like we've we've interacted with a lot of different private equity groups that um in this industry and others that are institutional, run-of-the-mill private equity, and they've been great. Like they're doing awesome things, they take a long-term view, they're trying to keep all the people that they can because it's like uh you're growing the business, so there's always room for people to be put into different roles and to move around. Um, and I really think fundamentally it's like when a private equity group gets involved into a business, where it gets bad is when they mess with the customer experience and the employee experience. And when they do both of those things, that's when it gets classified as kind of bad PE experience. Um, but sometimes it can be confused with, oh man, a lot of employees left. Well, maybe they left because they were used to running a mom and pop lifestyle business where they had basically unlimited range to do whatever they wanted to do, show up late, leave early, take a bunch of vacation. And then somebody else comes in and says, Hey, we want you to work normal hours, we want you to have, you know, benchmarks and KPIs, and and and they just don't want to do that anymore. And it's like, well, that stinks, you know, I don't like that. And it's like, well, you know, I I don't know if that's necessarily a bad thing. Um, and so I think some of that is really tough. I think also you get a you hear stories where it's like, I remember when we bought Alarm Masters and we're not private equity, and we had a customer that was like frustrated because he used to exchange tires for service with the prior owner. And it was like, I mean, we're not doing that anymore. We're not and he was like, Well, you mean y'all have really changed. It's like I I don't know that we've really changed. I just think we want fee for service, you know? And so I think that it just kind of depends on what

is happening. But the, you know, I do think we should just spend a few minutes on the ADT Thrive thing. I think that's a really interesting case study of, you know, we saw Morgan Stanley enter in the market. Obviously, Blackstone's in the market. Like there's a lot of people that are large institutional. And one thing that's super interesting about Thrive is they are characterized by using uh they are a tech, they're mostly tech companies, is what they're most traditionally known for. And they are they are really known for having what I would just say technologists that are on their shared service staff that provide cutting-edge advantage to their portfolio companies. And so that manifests like this. They have an AI lab basically built into their shared services that is providing cutting-edge AI technology to all their portfolio companies. And so this is, I think, the first one we have seen, which we predicted. Hello, if you've been listening to our podcast, you have heard us say this that private equity companies that have AI labs or AI think tanks that are built in, teams that are built into their business, are gonna start entering into the blue-collar market and they're gonna start buying businesses and applying that AI advantage to reduce back office, compress prices, and become faster. And um, I think we're beginning to see that manifest here. And it's gonna be really interesting to see how many people jump into you know the service-based world.

Yeah, because these large institutional players um can be a net positive for the end customer and the consumer. And I actually think, you know, ADT holistically does get some pretty strong criticism. Um commercial, you know, Everon or or residential. And so I think in this scenario, my hunch is that that acquisition is actually going to really benefit the consumer.

Yeah. Yeah, it'll be interesting to see how it goes. Uh it'll depend on how they use one complaint that a lot of people have about ADT is that they feel like it's so corporate they can't get a hold of a human being to have a conversation. And so it could go even farther down that spectrum and get worse, or it could get even better where they use technology to take away manual tasks, so that which is what we're doing, so that we can we want to maximize the human interaction. We want you to talk to a human being on the phone that works for our company from the minute you call in, um, and and a person that can really fix the problem for you. Um so it'll be interesting to see what happens there. Um, they are going private, so I think that will help. Um big time. You know, I think they're not going to be thinking so quarter to quarter. I think hopefully they'll be thinking a little bit more long term. Um, you know, and this is really ADT split from or Everon split from ADT. So ADT is more focused on SMB and Resi, and really this like home automation solar renaissance that's going on. And then Everon's obviously extremely focused on commercial or exclusively focused on commercial, I should say. So um I guess we'll see what happens. But yeah, I mean, I think the moral of the story, my closing thoughts on the is private equity ruining. Um, I would say no, it's not ruining it, but it is I I would say one, it's providing an outcome for some of our friends that are ready to sell their businesses and they have gotten awesome generational wealth. And so I'm super excited about that for some of my friends. But yeah, we're gonna we're gonna see some of these kind of financial engineering institutional private equity companies that are gonna provide bad experiences and people that have built 50-year-old companies are gonna sell and you know they're gonna lose their staff and their their customers, and and that is also the double-edged sword.

If people want to hear more about uh the good and the bad of buying businesses, selling businesses, private equity, where might they go, Colin?

Yeah, I mean, I mean, they could like and subscribe this podcast right here. Also, we have this super cool newsletter that we write. Do we I don't I don't think we get credit for it, but we should be getting more credit for we have several we can say this now. We have several thousands of subscribers to our newsletter. It's actually growing faster than the podcast, which is hilarious. Uh, maybe we missed our calling, maybe we should have been authors. Problem is, is we like the way we look too much. So we hope you like the way we look and you will like it, subscribe, and send it to your friends. We hope you have a fantastic, uh, fantastic week. Thanks for listening.