Toolboxplaybook-back-btn Playbookplaybook-back-btn Chapter 2

CHAPTER 2

Building a Company for Success

Whether your plan is to build a strong local company with a great reputation or a national powerhouse franchise with unlimited potential, knowing how to create, and recognize, value is essential. That starts on Day 1.

SECTION 1 OF 2

How to Build a Rockstar Company

In the early 2000s, John Holsapple boarded a plane and moved to the other side of the world to live in Beijing, China. He was on an entrepreneurial mission to start a school, but he had a few obstacles.

“I did not speak Chinese, I had no business experience, no college degree, I had never taught before, and—to top it off—I had no money,” Holsapple told a virtual audience as part of ServiceTitan’s Pantheon 2020 of those early days as a business leader. “The deck seemed pretty stacked against me, and I should have failed right then.”

Despite the odds, the business took off but made him miserable. Holsapple describes feeling every day as “it can’t get much worse than this,” but it somehow did. 

“Life was pure chaos, because the foundation I had built was completely rotten,” he says. “My workload increased, my stress increased, and not surprisingly, the business completely and spectacularly failed.” 

Holsapple, now CEO at Stanley Ruth Air Conditioning Company in New York City, credits that failure with forming his business philosophy: How do I build a business with the right foundation? 

Following those years as a scrappy entrepreneur overseas, Holsapple gained experience as an M&A (Mergers and Acquisitions) practitioner who worked in venture capital, private equity, and received an MBA from a top business school. He has reviewed the financials for hundreds of HVAC companies and acquired several A/C companies. 

And he wants to turn every business he acquires into a rockstar business—which he defines as one that does not need the owner or CEO in order to stay alive. That doesn’t mean business owners shouldn’t work on the business or be valuable contributors. However, knowing the business can lose its owner and still keep its heartbeat is the best way to evaluate whether your company has staying power and value.

“Keep in mind, most businesses do not survive generational transfer,” Holsapple warns. “That could be you.” 

One way to think about how to keep that from happening, Holsapple says, is to buy with the intent to eventually sell, and with a plan for building value into the company. 

In M&A terms, a service company’s business value equals adjusted profit times a multiple, which represents an expected rate of return for an investment. For example, if your adjusted profit totals $1 million and your multiple is four, your business would be valued at $4 million. 

The measure most used for adjusted profit is adjusted EBITDA, which stands for earnings before interest, tax, depreciation, and amortization. Many people, like your accountant, and business valuation tools can help with figuring EBITDA.

Holsapple advises business owners to work on increasing their multiple, and here’s why: A typical multiple for a service contractor ranges between two and seven. For a company with $1 million of adjusted EBITDA, the business could be worth $2 million or $7 million. 

“That’s a 250 percent difference in value for a company with the same profit,” Holsapple says. “The value of your business is also a great proxy for measuring the strength of your company and the staying power of your business.”  

Focus on these five levers within your control, listed in order of importance, to increase the multiple of your business, and therefore the overall value of your company, Holsapple says. 

  1. Revenue quality. Revenue quality gets measured on two fronts: stickiness and growth. Holsapple says the best revenue is sticky revenue that’s contractually obligated in the form of recurring payment. For a service company, this usually takes the form of a maintenance contract. “You’re looking for predictable, recurring, and growing revenue,” Holsapple explains. Also important? Growth. “This is pretty simple, you want a business to grow,” he says. “Companies that command the highest multiples show a trend of growth.” 

  2. Customer quality. Closely tied to revenue quality is customer quality. There are three main parameters that dictate quality of customers: Loyalty, price sensitivity, and concentration. “You want customers to stick around and to increase the customer lifetime value of each customer,” Holsapple says. “Stop thinking about the dollar you earn today and start thinking more about that present value of the customer you have today.” Also important: Customers who value quality over low price, and a customer base that isn’t dependent on a small number of big customers to survive.

  3. Financial quality. This starts with trustworthy numbers with robust, underlying processes, and sign-off from an accountant. Holsapple says this is where most HVAC and other service companies make the biggest mistake, which “comes at a tremendous cost.” He suggests reviewed financials that identify problems and force better processes.

  4. Management. Holsapple describes the worst type of business as owner-managed, meaning the owner makes all of the day-to-day decisions, serves as their lead salesman, or manages 10 or more direct reports. “You need a great hired gun at your company,” he advises. “The owner should be focused more on that long-term strategy.”

  5. Your engine. Holsapple describes the metaphorical engine that powers your business: your team and the systems they use to do their jobs. “To exhaust the engine metaphor, you can have ample high-quality gas—that’s your revenue and your customers,” he says. “You can have an accurate and thorough speedometer and odometer, which I view as your financials and KPI; and a great driver—your management team, your middle managers—but it really doesn’t mean a thing unless you have a great engine.”

Part of that metaphorical engine, Holsapple says, is a cloud-based software such as ServiceTitan. Holsapple credits ServiceTitan with introducing the efficiency and data tracking necessary to achieve his company’s overall goals.

“I swear, ServiceTitan doesn’t pay me—we pay them actually,” he says. “ServiceTitan is unequivocally the best contractor software out there.”

But to build value, you have to have a company to build. 

Go to Section 2: Finding a Company to Purchase