Underpressure Inc

In January 2024, Eagle Peak Capital Partner's Principal acquired Underpressure Inc, a small kitchen exhaust cleaning business based near Richmond, VA.

Underpressure offers specialized services for kitchen grease exhaust systems, tiled floor cleanings, and exterior pressure washing. The business offers some of the most knowledgeable, well-trained kitchen exhaust hood cleaners and service technicians in the industry — with training in accordance with the guidelines established by the National Fire Protection Association (NFPA) and the International Kitchen Exhaust Cleaning Association (IKECA). It provides services across the Commonwealth of Virginia.

If You Own a Profitable Small Business, You'll Make More Money by Not Selling

In almost all cases, the most value-enhancing course of action for the owner of a small business is to stay the course and not sell. Here's the math. Let us assume that you own a firm generating $7 million in revenue and are taking home $1.5 million in profit a year (around $1 million after tax). Let us further assume that you come to an agreement to sell your company at $7.5 million — all cash, no seller notes or deferred payments. This is a huge economic windfall. But if you were to invest the after-tax amount (around $6 million) in a mutual fund that you expected to return 10% a year (and that's a high estimate), you'd be making around $600k a year pre-tax and likely well under $450k a year after taxes. That's a lot less than you were making before when you owned your business. This should not come as a surprise. As the owner of a business, you are shouldering the burden of running an organization, monetizing your expertise, and taking on a considerable amount of risk. In selling your business, you are relieving yourself of the duties of an owner/operator and passing those responsibilities — along with the associated risk — to another party. This does not mean it's a bad idea to sell. There are many other good reasons to sell a business — de-risking, interest in other pursuits, retirement, health, and so on. Furthermore, there are ample opportunities to strike a middle ground by adding provisions to your deal such as rolling over some equity. If you are considering the sale of your business, you may be interested in some of the resources posted at eaglepeakcap.com/resources. And if I can be of assistance, please reach out to me at rknauer@eaglepeakcap.com. Thanks, and stay well!

Our Dynamic Labor Force

The U.S. Department of Labor releases monthly employment information, and these reports have received quite a bit of attention in recent months because of their tie-in to inflation. Investors and economists are aware that the Federal Reserve is closely monitoring these reports to get a sense for the impact of rate hikes on the real economy — slower labor growth suggests the increased likelihood of rate cuts. (The latest job data from November indicates that the United States added about 200,000 jobs and that unemployment is at 3.7%, but that is not the subject of this post.)

What many observers gloss over is the remarkable dynamism that these reports reveal about the U.S. economy. The roughly 200,000 jobs added in November represents a pretty small slice of the labor force. Multiply it by 12 to get the annualized figure, and it comes to just 1.4% of the total civilian labor force. But that number hides a high level of churn because it is the difference between two much larger numbers. During the month of November, about 2.6 million jobs were created, and about 2.4 million were lost, with the roughly 200,000 difference between those two numbers being the number of jobs created. The quarterly changes are illustrated in the below chart from the U.S. Bureau of Labor Statistics.

Consider what this is telling us about the economy. If our economy creates 2.6 million a month, that comes to over 30 million jobs per year, or 19% of the total labor force of about 168 million. At that rate, the total labor force takes just over give years to completely turn over.

Of course, many employees hold on to their jobs for much longer periods of time. These long-tenured employees are offset by those working in jobs in cyclical or declining industries as well as those with high rates of turnover, such as fast food and retail, some of which turn over more than 100% of their labor force every year.

This is the result of the U.S. having a dynamic labor force. Employers tend to react quickly to changing economic conditions as well as evolving requirements in the labor force. If the demand for paper manufacturing goes down, employers will reduce their staffs — quickly. And they will ramp up quickly in response to increasing demand, such as the recent uptick in demand for home services. The same is not true in Europe, where employees stay in their jobs for much longer, partially due to labor laws making it difficult to lay employees off. Of course, this also makes it much more difficult to be hired on to a job in Europe.

We have a ruthless job market that is not suited to everyone, particularly those who have difficulty transitioning to different industries. But it also keeps out economy highly adaptable to changing conditions and is one of the reasons for our continuing economic strength.

Additional Reading

-BLS November Employment Data