“To effectively sell your business, you have to start thinking about that years, not months, in advance. Because ultimately what we’re looking for is the result of a yearslong building process of culture.” — Stephen Saunders, Chief Development Officer, TurnPoint Services"
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There’s a feeding frenzy afoot in home services, says Jamie Johns, ServiceTitan Senior Director of Customer Experience, Finance and Accounting. And it’s one that ultimately benefits contractors working in the trades, as long as they’re prepared to act.
“We are in a private-equity boom,” he says. “We are in a period of rapid expansion. It's a highly active market, a high-volume, and a high-velocity market. Transactions are moving quicker and growing faster.”
Over the last decade, the amount of funding in deal values and the value of exit transactions both increased by 350%, he shared during his M&A (merger and acquisition) presentation at Pantheon 2022, ServiceTitan’s annual conference for the trades.
To help contractors prepare for the M&A market, Johns moderated a panel with three M&A pros: Fred Silberstein, founder and principal, SF&P Advisors; Stephen Saunders, chief development officer, Turnpoint Services; and Landon Brewer, founder, Service Einstein.
Wondering if now’s the right time to put your home services business on the market? Read on for the key takeaways.
M&A Prep for Contractors
To start, Brewer advises knowing what you want out of the transaction.
“You really have to sit down and assess why you're interested in doing a transaction and what the end result is going to be for you,” he says. “I'm a big fan of writing it all down. All the things you'd like to achieve, all the reasons why you're doing this.”
Once you know your goals, ask potential buyers how they will help you achieve them.
Also, contractors planning to sell their companies must understand their net results, which are measured by EBITDA (earnings before interest, taxes, depreciation, and amortization).
“We like to add another ‘A’ on there for add-backs,” Silberstein says. “And those would be non-recurring personal expenses that would not be part of the business going forward. This should really be calculated monthly.”
It’s also important to find ways to grow EBITDA, such as exploring consumer financing programs, examining equipment vendors for better deals, and ensuring pricing reflects recent inflation.
In addition to good KPIs, Saunders says buyers look for a happy and healthy organization.
“The years you spent building your business are the most important preparation,” he adds. “Leadership, culture, reputation in the market, and a long-term record of consistent growth and financial performance — that's what, as a buyer, we’re really looking for.”
Saunders also stresses the importance of getting your financial house in order and having good tracking systems in place.
“Just getting organized going in will help you focus on the business and the process while you're in the market talking to buyers, so you’re not scrambling and being reactive,” he says.
What Home Services Buyers Want
Strong leadership proves crucial, according to Saunders.
“We're really looking for businesses with great leadership and with the culture that comes from great leadership,” he says. “We've found that great leaders develop great cultures, which lead to really happy employees and really happy customers, which lead to growth and profitability.“
Buyers also look at the following high-level metrics, he adds.
Revenue mix
Gross profitability/margin on service lines
Lead generation and conversion
Average ticket prices
Employee tenure
Employee retention
“If you can demonstrate consistent performance on all the metrics that I just laid out, you're golden,” he says. “Those are really the keys.”
More than tracking KPIs, Brewer advises business owners must demonstrate a mastery of what their KPIs mean and how they can use them to drive growth and profitability.
“These are very analytical businesses, so if you know how to drive the data to move the needle, that's very important,” Brewer says. “That will be the thing that sets you apart from your local competitors.”
Of course, each buyers’ needs are unique, Brewer notes.
“Every buyer is slightly different, has a slightly different strategy,” he says. “It's not exactly cookie-cutter. But universally, everybody's looking for the same thing, and that is experience and reputation. You can evidence that through your reviews, any complaint history, legal history, the tenure in business, size of your customer base, size of your maintenance club base, call counts, etcetera.”
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“If you’re seriously considering this, I would sit down and document ‘Why us? What sets us apart?’” Brewer says. “Build your brand story.”
He also recommends finding good representation to guide you through the process and strategically selecting the right buyer.
“What are the key attributes of a partner that you'd like to see bring in?” he asks. “Is there a certain expertise from a marketing operation standpoint? Is it just capital? I would sit down and list all of these things.”
Common Selling Mistakes
Johns asked the panelists to explain the most common mistakes contractors make when negotiating sales. They responded with the following:
Trying to go through the process alone
Not getting multiple offers
Not understanding legal and financial definitions
Overpromising
Not knowing what you want out of the deal
Not having a succession plan in place
Choosing the wrong buyer
“Due diligence isn't just for them to look at your books, it's for you to do diligence on the buyer as well,” Brewer says. “There are all kinds of buyers out there, so it's got to be somebody that's a good fit for you as a person, as a team, and for the direction of your business.”
Build for the Future
In order to sell, Silberstein notes you must build your business for the future by developing a robust C-suite and creating a succession plan.
“Be clear in your objectives,” he says. “Are you looking to stay and be part of a bigger organization? Are you leaving? Do you want to roll equity? Those are things that you ought to have in place.”
This planning starts years in advance.
“To effectively sell your business, you have to start thinking about that years, not months, in advance,” Saunders says. “Because ultimately what we’re looking for is the result of a yearslong building process of culture. It's embedded culture, it's embedded behaviors, systems, procedures that not just you can talk about and tell a buyer about, but that they can observe and witness within your employee base.”
>>Find more from Pantheon 2022
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