When you are looking at an exit or sales of your home service business, consider who your ideal buyer is. Here are some considerations and potential targets for an exit event.
PE Roll Up
Who they are
If you haven’t heard, Private equity firms (PE) are making lots of investments into home services businesses. These are professional investors who are looking to deploy capital on behalf of their own investors. They usually are looking for medium growth opportunities where they can leverage capital to consolidate markets and then flip the assets.
What they want
PE is looking at companies to consolidate in a specific market or geographic area and often will be looking for companies with strong cash flows that are profitable. Exact figures vary by specific trade but usually you are looking at at least $1M in overall revenue to be a target for PE and they will usually value your business based on your EBIDTA margin. Lately we are hearing and seeing around a 10-12x multiple of EBITDA for valuation - which would mean that if you have $1M in revenue with a 15% margin, your business would be valued as $1M revenue x 15% margin x 12 = $1.8M value.
**Note: exact multiple will have many variables based on your specific trade.Most PE firms are not operators themselves and don’t have staff to run your business, so they often look for ownership to stay onboard either long enough to find new management or through the length of the investment.
PE is looking at your business as in investment that they likely plan to sell in a 5-7 year time frame after increasing its value. So, they want a business they feel they can grow or at least make more efficient and profitable.
Considerations
Will you still get to be involved in the business (do you even want to?) and will you get any equity in the roll up business to give you incentive to help the business grow? If there is an equity aspect, make sure you understand what is required for you to qualify for future outcomes b/c it might have some growth requirements in the agreement.
If you are going to stay onboard to help run the business, make sure to understand what your will still be in control of and what you are going to relinquish to the new owners. Many PE firms are hands off operators who simply want to provide marketing and technical support to help drive efficiency and medium growth. But make sure to at least ask and get it in writing if you can.
Strategic Platform Purchase
Who they are
This is usually a large home services provider that is looking to grow into a new market or invest in a new service/product line. They are likely a large organization with a strong brand outside of your market or service area.
What they want
The goal is probably to buy a strong brand in a specific market that they can use to rapidly expand into a new region or product line. They may or may not want to keep the existing brand in place and they likely have their own teams/staff to take over operations either right away or over time.
They want to purchase a company to move fast and avoid having to slowly build into a new market. Sometimes they are ok with buying a distressed asset if they feel they can provide operational improvements and not only expand their business quickly but also improve the performance of the acquisition.
Considerations
Does your brand offer a strategic opportunity for the new business to enter the market and what is the potential for growth that you can present to this new owner? If you are able to create a large customer base or geographic footprint for this new entity very quickly, then you can consider not only the value of your existing revenue but also the value of the time it might take for the acquirer to build something themselves and likely increase your overall value.
Local Buyer
Who they are
The buyer may or may not be an experienced home services operator but they are very likely to be a high net worth individual looking to invest in assets that give a strong return on invested capital. They often tend to be locally based in your market and connect through local business networks.
What they want
This buyer is looking for a company that can provide immediate cash flow as an existing and ongoing operation.
If they have little experience in your industry, they might not want to do day-to-day operations but they may be able to provide business direction as a silent partner or give operating capital to expand the business.
Considerations
You might find a local investor who is interested in entering the market and wants to find an existing business to acquire. This is a fairly straight forward transaction where you can index on industry benchmarks to value your business. This is also more likely to be a scenario where you are going to fully exit the business and have the new owner take over operations.
Merger
Who they are
This would be another business in the same industry (or a closely adjacent vertical) where you would both benefit from efficiencies by merging together.
What they want
This will vary significantly based on the make-up of the businesses involved. The actual value of the merger is going to come from what each party is looking to get out of the event and what they both bring to the table. Greater route density, brand expansion, share of wallet from cross ales, internal efficiencies and greater cashflows are all items to consider.
Considerations
Sometimes 1+1 can equal 3 and both businesses benefit from consolidation to a larger company. Make sure to consider your equity stake in the new entity and who will ultimately be running the new consolidated business. If you are not interested in being actively involved in the new business, check on what your expected responsibilities will be and if they match your own expectations.
Additional consideration
Just because one business is larger, doesn’t mean that they are bringing more value to the equation in terms of who owns what % of the new combined business. Consider the future value that you create from the merger, not just the current revenue.
Succession Purchase
Who they are
Many home services businesses are family-run and you might have a family member who is working in the business with you who is looking to take over when you retire.
What they want
Ideally, they want to continue to operate and grow the business. They probably also want to continue in the company after you retire from it and they likely don’t want to see the business go to a 3rd party who may or may not keep them employed.
Considerations
You don’t have to ‘gift’ your business to your kids or relatives. You spent a long time (maybe a lifetime) building your company into an asset. If your dream is to leave this asset to your children, consider a debt purchase that allows you to extract up front value from the transaction without having to gift the business. We recommend you speak with a tax/retirement advisor about what your options are in this area.
Make sure they want to RUN the business before you look to transfer the ownership/management of the business. Perhaps your kids do not want to operate the business and you would be better off selling to a 3rd party and leaving them part of the profits as an inheritance. If their goal is simply to sell the company after you are gone, consider aligning to a sale beforehand.
Shop the deal to get market rate before you set a price. While you may not mind selling the business for a fair value below the best possible price you can attract, that doesn’t mean you should take a massive discount or leave too much on the table. Find out what market rates are before you set the actual price. This is where an investment/advisory group can help you with what overall market rate ranges look like.
Employee Buyout
Who they are
If you aren’t looking to move the business to one of the above listed options, you may consider allowing some key employees to acquire the company at a fair market rate. This can be useful if you have a small(ish) business that has not attracted offers from other sources.
What they want
These are your employees looking to buy the company. They most likely care deeply about continuing the business operation even after you are no longer involved.
This buyer may be looking to expand their own income by taking over the overall direction of the company.
Buying your company is easier than building one from scratch. These employees benefit from the hard work you (and they) already put into building your revenue/brand and business.
Considerations
You may benefit from having invested buyers who already know the business. This can make the impact on all employees less of a shock.
This option can work very well for businesses that are not large enough or in big enough markets to attract buyers from outside of the immediate market.
This option may or may not overlap with a succession purchase if your kids work inside the business.