As Contractors Consolidate Do Relationships Matter?

The Rise of Private Equity in the Trades

A new surge in private equity (PE) investment is transforming industries, and nowhere is this more apparent than in the skilled trades. The rise of private equity in HVAC, plumbing, and electrical services, as highlighted in the October 12, 2024, Wall Street Journal article America’s New Millionaire Class: Plumbers and HVAC Entrepreneurs, is not just about buyouts and big paydays for local entrepreneurs—it's about a seismic shift in how these businesses operate. As PE-backed companies optimize operations for efficiency and growth, the question becomes: how will this impact the long-standing relationship-based sales model that has defined the wholesale and distribution industries?

PE firms are transforming small, family-run businesses into parts of larger, data-driven operations:

...chances are one of the service trucks you have seen drive by has recently changed hands. Private equity investors have purchased nearly 800 HVAC, plumbing, and electrical companies since 2022...

The article notes that Private equity-backed companies like Redwood Services, which bought Aaron Rice’s plumbing business, are injecting managerial know-how, beefed-up marketing budgets, and back-office efficiency into what were once mom-and-pop shops. These firms aren’t just buying; they’re scaling, automating, and optimizing. For example, Rite Way, a Tucson-based HVAC company, grew from $30 million to $70 million in revenue under Redwood's ownership.

What Does This Mean for Wholesale and Distribution? 

For years, businesses in the skilled trades and wholesale distribution sectors have thrived on strong, relationship-based sales. Personal touch and long-standing partnerships were the backbone of success. But as PE-backed companies aggressively optimize for operational efficiency, the reliance on digital tools and eCommerce is growing. The article shows that private equity isn’t just buying businesses—they’re fundamentally changing the way these businesses operate. This shift away from relationship-driven models toward digital and eCommerce solutions is something wholesalers and distributors need to accommodate.

Private equity firms scrutinize costs and margins to ensure prices align with the market. “Small-business owners are often too busy to juggle such an array of tasks, or they charge prices that are years out of date,” Redwood Services CEO Richard Lewis pointed out, now “if the price of a screw goes up, it gets passed on to the customer.” This meticulous approach to optimization and growth is something wholesalers have typically avoided—relying instead on long-standing relationships to drive business. 

The Digital Shift Is Accelerating

With private equity ramping up digital operations, your customers are likely being courted by competitors that can offer streamlined online experiences, digital self-service, and other automation. Businesses like Aaron Rice’s and Rite Way have transformed their operations by leveraging capital and PE backing to expand services and adopt new technologies.

If you’re still depending on relationship-based sales and looking at digital and eCommerce solutions as an afterthought, now is the time to act. PE firms are transforming entire industries by bringing in resources and expertise that scale businesses faster and make them more profitable. The article notes that this is part of a larger trend across sectors as varied as car washes, nursing homes, and now skilled trades. 

But it’s more than just a financial trend—it’s a wake-up call for industries that have long relied on relationships over digital. As your customers optimize for growth and efficiency, are you doing the same?