Selling Your Pool Business? Protect Yourself Before You Sign

0:00The cat tells the chemistry is good by looking at it in closing clear yesterday from the last time. The saltwater pool is a chlorine pool! This is the Talking Pool's podcast with pool pros from every region in the country. If it happens in a pool, you'll hear about it here. Everything from tips and hacks to the latest tricks and trends. Breaking news? We lay it on the line. We tell it like it is because we think you deserve to know. Hey everybody and welcome back to another episode of The Insurance Interlude with your host Steve Sherwood and our co-host, Packer Njol.

1:01So Pat, thanks so much for being here. I think I've told you this before. But last year, I got approached by someone that went through my CPO course and they were so impressed with us that they were like, we want to buy. Like we want to take you over. We want you to be part of our team. And when I went out a couple of meetings and I was just floored at what they were trying to do. You know what I mean? I was like, you guys are trying to build a company with 10,000 pools. There's dudes over here drowning with 100. So it's hard, it's a hard business, right? But money talks, right? And private equity is something that's not pool specific.

2:02All those big HVAC company plumbing companies that you see rolling around like a lot of those have gotten swallowed up by private equity. And you know, are part of that now. So I didn't do it. And the reason is because it took, it took like a decade for me to be able to get to the point where I am now. And the amount that they were offering at the beginning was just basically like a salary. And it was more than what I make. But it wasn't enough for me to go back to the 9 to 5 grind. You know what I mean? That number has got to have a fucking lot of zeros on it. So I was just, I was like, wow, this is amazing. Like I'm floored. But I was like, I don't think it's the right time for me to do this because like number one, I'm not ready to go.

3:07I'm not going to go work for somebody else at this point. So I was like, maybe we like chat later on. So let's fast forward 10 years. The next decade. Bigger beard, less hair. So they come back. And now they don't have, you know, the goal is 10,000 pools. You know, they're at a three, four, five, six. They're getting up there. And they come back and they're knocking. They don't need me to work for them anymore, but they want my pools. So is there something that I need to be aware of? Is there anything that I need to do, you know, prior to this? That would make this transition as smooth as possible. And what are some of the, you know, pitfalls of this? Because what happens if you, you know, you've built this, and everybody's business is their baby, right?

4:14Yeah. So now you, your baby gets picked up by private equity and maybe don't like it. Maybe don't like what's going on. Maybe you want to take it back. You know, like what are some scenarios here with, with things that you might have to think about before you step up to the plate? With private equity? Yeah. Yeah. Look, I think, you know, there's going to be for sure significant requirements to sell the company to like a larger company or a private equity back company. But, you know, this is going to be pretty similar to even if you're just selling your route, you know, to another pool company. Or if you're just going to retire and close the business. So, you know, you're, you're insurance. So one thing that you need to get in all three of those situations, like again, private equity won't do the deal with you. If you don't have this in place, it's called tail coverage. They normally require five years of tail coverage.

5:16So it's a separate policy that you purchase where you're going to stop paying for your general liability and your insurance policies once the business gets sold. So if the business is sold on September 1st, you know, the business that bought it has insurance, that insurance will cover it from that point on. So I'm not going to continue to pay premiums on a business that I've sold. And so what they normally requires that, you know, that you purchase a five, a three to five year tail coverage, which essentially would cover anything that when you own the business, the mistake was made. But the claim actually happened when it was on, what it was on their insurance. And so it's basically the theory behind that is, you know, you would have most claims that from prior works or prior acts are going to, they're going to come up over the course of five years. And after five years, the likelihood of something coming back from work that you did five years ago is extremely low, where you'd still be on the hook for it.

6:19So they normally require you to buy a tail policy of some sort. You know, and also, too, there's always, you know, there's always restrictive covenants. So you can't just go starting another pool company down the street, you know, next week and start taking all your customers back. So, you know, that's going to be a part of it. The restrictive covenants are going to be non-compete and non-salisits. So two different things, right? So a lot of them, they're lumpsy. Is a non-compete, is that enforceable in California? If there's an exchange of assets, 100%. You know, so, so California is a right to work state. And so you can have non-salisits, which means it's a right to work. Like if you if you're working for an insurance agency or pool company and you exit, that's fine. You have a right to do that and go start your own business or work at another company, but you can't come back and hurt the company by stealing employees or stealing clients from the company that you accident.

7:20So that's not necessarily the letter of the law, but that's part of most like higher packets. And that's enforceable in California. So non-salisit means you can't come back and solicit clients and employees for the business. A non-compete means that you can't do anything in the same business, right? So pretty common, if you were going to sell your company to a larger company, they're going to require tail coverage. And they're going to have non-compete language, which is totally enforceable because they bought it from you. There's an exchange of assets there. And that means that you can't like, it might be written that you can't even be a lifeguard at a pool. Like you can't do anything in the pool business, right? If you sold a service company, you can't go start a construction company or an inspection company or anything, right? So non-compete means I can't work in the pool business unless I work for the company that bought my business. And that totally is enforceable across the country every state, if there's any exchange in assets.

8:24And it makes sense, right? You don't want to buy someone's business and have them open up down the street the next month. No, that's not the cost. Yeah, of course. But those are for sure going to be part of it. But if it, frankly, you know, those, if you're, those should be part of like anyone who's buying a route, you should be looking at some sort of restrictive cabinets to make sure that, you know, if someone's retiring, you know, you probably should get tail coverage, even if you're not selling the route. You know, there's not going to be non-compete or restricted. Now, who pays for the tail coverage, the guy that sold the business or the guy's that bought the cellar? How much does that run? Like regular policy or a cheap? It's a little bit more expensive than a regular policy to be honest with you. Yeah, they're definitely not cheap. Man, this is like a, it's always something, right? So they get you, they get you calm and they get you going and they get something.

9:27But, you know, look, I think ultimately, you know, if you're walking away from your business, some policies, you know, most policies are going to want to tell coverage regardless. But a lot of policies are like a current space. And so like, you'd be more comfortable walking away and not getting a tail like our policies and a current space policy, which means that you'd have some coverage that would kick in in situations where, you know, you're down the road. Someone's like, God, a, you know, Peter blew up and killed my dog like, you know, you owe me a bunch of money. You know, like there's some policies where you don't have to get the tail coverage. But a lot of the terms are going to dictate that you need to have it. But they're like, get a lawyer, 100% get a lawyer. Read the contract. Get a lawyer. Yeah, it's not your, not your uncle who's a divorce lawyer. Get like a deal attorney to, I don't care how much they cost. But if you're selling your business, I don't care who it's going to get a deal attorney, whether it's, you know, cheap or otherwise, like get someone who's familiar with this stuff so they can help put something together where it's just not all one sided where you're taking all the lumps and they're getting all the all the wins off of you.

10:31Sure. So guys, if you're ready to sell your business, best of luck to you. If you're not ready to sell your business, check out California pool association for your insurance needs. Alright, so if you tell them about the talking pools podcast, they will give you a month free on your annual general liability policy, which is a great deal. And they do a bunch of different kinds of insurance. They take care of all of this stuff that we talk about on the show. So reach out to them for all of your needs. Thank you so much for listening and Pat. Thank you so much for being here. Guys, have a great week. Thanks, Steve. Thanks, Steve. Thanks. I just wanted to say thank you for listening today. I'm hoping you enjoyed the episode as much as we enjoyed putting it together for you.

11:32Listen, it's been a couple of wacky, crazy, screwed-up years from pandemic to pooling again. I just want you to know that we are all in this together. If there's anything that we can do for you, send me an email at TalkingPoolsatgmail.com. Again, that's TalkingPoolsatgmail.com. We're here. This is your podcast. We are the Pool People's Podcast of the pool people for the pool people by the pool people's podcast. This one is about you. So thank you for tuning in and listening. Do me a favor. Click subscribe before you go. That way you don't miss an episode. Thank you.