Johannes Hock·October 2, 2023

Buy and 3x a Project Based Business in Just 2 Years | Johannes Hock Interview

Johannes Hock, a former private equity associate (non-controlled deals at a PE fund) who grew up in Germany and came to the US on a track scholarship, partnered with a fellow associate to do a self-funded search beginning in fall 2021. Six weeks in, they signed an LOI for DFW Turf Solutions, a Dallas-based residential artificial turf installation company doing just over $5m in revenue and growing ~60-70% per year. The deal was complicated by the rapid growth making standard SBA underwriting difficult; they found a bank willing to underwrite on LTM quality of earnings, and the deal closed with almost no cash reserves — a fact that made the first two weeks (coinciding with an ice storm that halted all installations) genuinely terrifying. The core thesis was long Texas demographics and long artificial turf adoption: with roughly 1-in-100 North Texas homes having turf versus 1-in-5 on the West Coast, Johannes saw a long visible adoption curve. By late 2023 the business had grown to roughly 3-3.5x its acquisition size, reaching 22 employees from 7-8. Key growth drivers included aggressive truck/equipment purchasing in year one, digital marketing and SEO improvements, and a strategically assembled investor base with relevant domain expertise. A key lesson was margin pressure from sales commissions: as the GM's share of sales shrank with scale, a larger portion of jobs required dedicated sales reps with full commission structures, compressing margins relative to their original underwriting.

Deal facts

multiple: towards upper end of 3x-4.5x SDE range (not stated precisely)
revenue: just over $5m at acquisition (end of 2021); ~3.5x that by end of 2023
financing structure: SBA 7(a) loan + seller note + equity; bank underwrote on LTM Q of E and closed with 2021 tax return due to rapid growth
notes: Business was growing ~60-70% YoY at time of acquisition, which made standard SBA financing extremely difficult. Partners did a self-funded search. Sellers were motivated to fund a real estate development. Deal took five months to close. Started with almost no cash in the bank at close.

Why this business

Johannes and his partner were long on Texas demographic growth and long on artificial turf adoption. They saw that turf penetration in North Texas (roughly 1 in 100 homes) was far behind markets like Southern California and Arizona (roughly 1 in 5 homes or more), and that millennial homebuyers preferred low-maintenance yards. The business had a strong general manager already in place, real Tailwinds, high customer reviews across the industry indicating genuine product-market fit, and a high referral rate. The industry was growing rapidly enough that even with execution risk there was room for error.

What's working

Strong industry tailwinds: residential artificial turf adoption in Texas is far behind West Coast markets, providing a long visible runway for growth
General manager was already in place at acquisition, allowing the partners to work on the business rather than in it from day one
Aggressive capital deployment early: bought six or seven trucks in year one via a vehicle/equipment line to capture available demand
SEO and digital marketing improvements — found service areas where they were 'invisible' in certain channels and fixed that quickly
Strategically chosen investors with relevant expertise (SEO, Texas connections to home builders and pool builders) who provided operating leverage beyond capital
High referral rate from satisfied customers reduced cost of lead acquisition
Partner-based search provided redundancy, sounding board for decisions, and flexibility (vacations, scheduling) that a solo operator couldn't have

What's hard

Closed with almost no cash reserves; a two-week ice/snow storm immediately after closing meant zero installations and zero cash inflows while debt service clock was already ticking
Fast-growing business made SBA financing very difficult — required finding a bank willing to underwrite on LTM quality of earnings and wait for 2021 tax return; took five months to close
Flying blind on seasonality in year one with no historical data to compare against; every slow week triggered uncertainty about whether the trend was reversing
Sales commission margin drag: as the business scaled, the GM's share of sales shrank and a greater percentage of jobs required dedicated sales reps with full commissions, compressing margins relative to underwriting
Seasonal business risk — slow periods (especially the first two weeks after closing due to weather) created acute cash flow stress

Notable quotes

After you send you know the second or third uh tens of millions dollar wire across the table you start to wonder if you're sitting on the wrong side of the table.

I think uh it really depends on you know kind of what's the why and um what you want to do long term. For me it's always been this idea of there's a lot of things I want to do that won't make money, so I need to kind of get to uh my Nest Egg first.

The further up you go the chain the bigger the golden handcuffs become.

If you think about it, one year's worth of cash flow is a meaningful portion of the overall Enterprise Value. If I buy it four times today and I get the cash flow from a full year I'm effectively sitting at three times of that value one year later.