In the throes of the Great Recession, Paul Porter, CEO of Premier Pools Management Corp., made a prediction. Everyone knew the historic downturn would change the industry forever, but it was tough to know how. Porter had a strong suspicion: Builders needed to band together and would begin to consolidate.
He wasn’t talking about buying groups, but something more intensive, where companies join together to form one.
“Really, I take my cue from other industries,” Porter now says. “Whether it be local hardware stores, home builders or other industries, they’ve had to collaborate and consolidate for a lot of reasons.”
In 2010, Porter and then partner Keith Harbeck started a vehicle for the very consolidation he had spoken about. Premier Pools Management Company issued licenses granting other builders the right to its brand along with certain resources and services. In 2014, that vehicle was converted to a franchise model, at which point Harbeck took the founding location.
Now that the economy’s picking up, one can see signs of this type of consolidation taking place across industry segments — construction, retail and service — as franchises enter the industry and investors begin to show an interest again. Here, professionals discuss why this activity is taking place, and its chances for taking hold.
Buyers and sellers
On the construction side the consolidation trend is slow-going but shows increased interest.
To date, Premier has accumulated 43 franchise locations across 13 states in the U.S., along with two offices in Mexico.
At least two holding companies have shown an interest in the pool business. In the Phoenix area, two builders — Paddock Pools and Cameo Pools — were purchased by NexGen Holdings, which originally specialized in the repair and remanufacture of wind power turbines and solar power plants but added a pool-construction division to accommodate its acquisitions.
In Texas, AVEW Holdings has expanded its portfolio of miscellaneous landscape and construction firms with the purchase of service/maintenance company Fantastic Pool Services and builder Austin Premier Pools & Spas (not related to the Premier franchise), both of Austin.
Principals of some well-established pool builders report being approached by outside investors. “I’m getting a call almost every week, sometimes twice a week, asking if my company is for sale,” says Debra Smith, president of Pulliam Pools in Fort Worth, Texas.
The service segment lately distinguishes itself by seeing the most franchising activity, with at least three established franchisors and one getting its start.
Since it began franchising in 2005, Macon, Ga.-based America’s Swimming Pool Company has become 178 franchises strong, with a presence in 18 states. Vivo Pools of Monrovia, Calif., now serves 14 areas in six states. Orange County, Calif.’s 1 Stop Pool Pros began franchising in 2010 and now has 15 locations. And last year, Orlando-area franchisor Probity Pools was born from the 8-year-old service firm Tropical Breeze Pools.
In retail, Florida’s Pinch A Penny began franchising in 1976 and reportedly has more than 220 stores. Australian franchiser Poolwerx recently made its entrance into the U.S. market by purchasing Phoenix-area retailer Cactus Valley Pools.
The why of it
Experts point to a number of reasons why such consolidation is taking place.
First, technology has changed requirements just to do business. Companies must worry about website management, search engine optimization and staying up to date with the latest pool technology. And with business becoming more competitive, the need for buying power has increased.
“There are a lot of things the little guy can’t do anymore,” Porter says. “The natural progression is for consolidation, so you have one central location to provide all these resources. … Now the small guy can have the same resources as a big guy.”
The economy also offers an explanation. While access to capital is better than it was a few years ago, it still isn’t very easy to come by, making it difficult for companies to grow on their own, says Mark Siebert, CEO of iFranchise Group, a Chicago-area consulting firm. Through franchising and investment backing, companies can expand by spending someone else’s money.
The state of American franchising as a whole explains the increasing appearance of that business model in this field. Plenty of other industries have reached a franchise saturation point, and going against so many established players is not an attractive option. But the pool industry doesn’t have many franchises, so some industry outsiders see an opening.
“If you were to look at the hamburger industry, it’s going to be tough to go head-to-head with McDonalds,” Siebert says. “But in the pool and spa industry, because of the fact that there are no 800-pound gorillas and certainly none that are franchising, it’s going to be a lot easier to get substantial market penetration. In a fragmented industry, if you’ve got a better business model, you can achieve very rapid growth.”
The number of retiring military personnel also spelled opportunity for Probity Pools President Kevin Baron. These career seekers generally are in their mid-40s, show initiative and a penchant for service work. “They’ve got great leadership experience, and they’re very good at taking a plan and executing it,” he says. “That’s what you need in franchising.”
When it comes to investors, there’s a pretty simple reason why they are starting to show interest again: “Money’s getting better — it’s getting easier to obtain,” says Tim Murphy, president of Presidential Pools in Gilbert, Ariz. Murphy has experience with investors. He sold his company to private equity in 2006, then bought it back during the economic downturn.
It’s a good time for this kind of entry into the industry because the risk is low. Where 10 years ago, private-equity companies were buying at the height of the industry’s success, we’re now at a time where business is still on the upswing, but still not near 2006 numbers. In Phoenix, for instance, permit numbers are more comparable to 1990. So investors still are in a position to buy reasonably low, with substantially less risk.
In many cases, investors are interested in more than pools and spas, Porter says. They’re looking for ways to reach consumers of a certain earning power to potentially market other goods. He believes that explains why he’s been approached.
“People want our platform,” he said. “They want to be able to get to a new customer base [and] use this platform to launch other parts of industries.”
How good a fit?
On the franchising side, most of the attention has been given to the service-tech side of the industry.
There’s an important reason for that: It costs less. Return on investment is the major concern when starting a franchise, so prospects like the relatively low start-up costs of a service business.
“The ones that tend to grow fastest are the ones that have the lowest level of investment,” Siebert says. “So the service industry would probably be the one that would ultimately get the most franchisees.”
When Baron wanted to expand his company, he chose the franchise model because he figured it best suited the kind of work done by service companies. To just grow a company organically removes the company owner farther and farther from the work itself as the organizational chart expands, he says, while franchising allows the owners to stay near those maintaining the pools.
“If I want to grow my brand and I don’t want to franchise, I end up with one very high pyramid,” he says. “It became apparent that it’s difficult to offer the quality of service that we need without having an owner close to the day-to-day operations.”
Retail may prove attractive to franchising, some believe, because it doesn’t require the workmanship expertise and regulation involved with contracting.
But for many, the pairing of construction with franchising raises a big question mark. Besides requiring a significantly higher upfront investment than service, construction is arguably the most regulated, most affected by local idiosyncrasies such as soil conditions, requires the most technical skill and involves the highest liability risk. So it’s best if methods and procedures are figured out locally by experts familiar with the area, some have said.
Siebert counters that argument by pointing out various home-construction and home-improvement franchises.
“The question is not which segment did [the franchisor] address but, do they have a business model that … provides an adequate return on investment to provide a good business opportunity for somebody to either get into the business new or to convert their existing business into a branded franchise?” he says.
But where service franchisors are comfortable recruiting people from outside the industry, that probably would not be the best approach to a construction franchise, he added. That would call for a model like Premier’s, where established builders convert their businesses into franchises and serve as the construction experts.
“If you’re not going to do a conversion franchise, it’s pretty difficult to do a franchise that requires a great deal of complexity,” Seibert says.
And maybe the very difficulty of running a construction business can make this model more attractive, Murphy suggests. At least with a franchise, the business side and processes and procedures are figured out.
Potential to last
While some professionals are quick to point out examples where these types of models did not work in the pool industry, others say the time for franchising and outside investment has come, and examples will only become more prevalent.
As Porter sees it, this will force business owners to consider these models when they otherwise wouldn’t. “It creates efficiency and scalability that the little guy will never be able to compete with,” he says.
With a handful of franchisors having entered the industry, Siebert says, the chance of this business model surviving are increased. “When there is a fragmented industry like this, there will be a market leader who will break new ground, then a number of people will follow them,” he says. “There’s sort of a predictable pattern to that.”
But Porter doesn’t see the transition going smoothly. “It will happen … kicking and screaming because we have a lot of people who are very resistant to change in our industry,” he says.
But Baron expects it will be long-term. “I think when the dust settles in 10 years, every city’s probably going to have a half dozen or so major pool-maintenance brands,” he says.