“If buyers aren’t competing, they’re not going to be pushed to maximize their offer.”
— Brian Cohen
Including deals done with Ken Goodrich and other big names, SF&P Advisors has brokered roughly $1.5 billion dollars in assets traded in the home-services industry. SF&P business analyst Brian Cohen says the time for deals has never been hotter.
He talks to "Toolbox for the Trades" about the art of transactions, how the industry is proving to be both recession- and pandemic-proof, and why that’s a huge asset for trade company owners.
Here are Brian Cohen’s top tips for negotiating an ownership transaction in the home-services industry:
Key TakeawaysIt’s not just a sale, it’s a transaction.The pandemic showed the trade industry to be recession-proof.Multiple offers help you know a company’s true worth. Understand your fair market value. Be informed when you take that first phone call asking you to sell. Know when conditional considerations are necessary. Interview the buyer.A deep-management team is a benefit to an owner looking to sell. A transaction is usually good news for everybody.
It’s not just a sale, it’s a transaction.
These deals are never really an outright sale as much as the creation of a partnership, Cohen says.
“You’re not selling your business on a Friday and collecting your check and not showing up on Monday,” he says. “What we’re seeing more of are younger owners who understand the time value of money and want to become partners with a private equity company. There are additional benefits that come with that.”
The pandemic showed the trade industry to be recession-proof.
It started as a whisper, Cohen says, and then became a well-known fact that companies’ numbers were up and that we were deemed a pandemic-proof industry.
“This scenario makes us very interesting,” he says. “The trades have come under a whole different scrutiny than before. Buyers and private equity companies want to invest in these kinds of businesses.”
Multiple offers help you know a company’s true worth.
Any seller is going to feel more comfortable about a deal if they have multiple offers to choose among, Cohen says.
“Putting chemistry aside for a moment, just talking about numbers is a sophisticated game,” he says. “There’s a set of rules that private equity plays by, and they’re asking an HVAC contractor to play by those rules.
“Don’t be sectioned off from the herd and only be in a one-on-one conversation. You won’t get full value for your business.”
Understand your fair market value.
There are a number of intricacies to finding fair market, but Cohen says two primary ones are EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) and value multiples.
EBITDA includes all the expenses that run through your business. Multiples of a company’s worth in a sale/transaction can be affected by a multitude of factors—designated market area, geography, location, and more.
“Know that you can’t compare X company to Y company and determine a price,” he says.
Be informed when you take that first phone call asking you to sell.
The devil is in the details, Cohen says. A $10 million deal is not always a $10 million deal.
“They may offer you a $10 million deal, but is it cash closing?” he asks. “Or, are they offering $7 million with an earn-out over the next three years as long as you maintain a certain EBITDA number? You have to be aware of conditional considerations.”
Know when conditional considerations are necessary.
If a company is “nontraditional” then a conditional consideration may be a good play, but the majority of the time it’s not, Cohen says.
He adds that companies using ServiceTitan have all their numbers readily available, can show install numbers, marketing, cost-per-acquisition, and all those things.
“But if you fall outside that and the buyer doesn’t fully understand what you do, you might need to have conditional considerations,” he says.
Interview the buyer.
Cohen says that is as important as the numbers are, so is chemistry with a buyer, and knowing their history.
“While you’re going through a process and they’re interviewing you as a seller, interview them as a buyer,” he says. “Ask them about deals they’ve done in the past. Get some references to talk to. Get an idea if what they’re telling you is what they’ve told others and whether they follow through.”
A deep management team is a benefit to an owner looking to sell.
Buyers are taking a risk in a transaction and don’t necessarily know that a seller is going to step up and do what they say they’re going to do, Cohen says. One way to alleviate that concern is to have a deep management team in place.
“Buyers love to see that the business is not purely dependent on you,” he says. “They’ll pay a deep-management scenario handsomely.”
A transaction is usually good news for everybody.
Employees of a company that goes through a sale/transaction need not be too concerned, Cohen says.
“Usually, it’s a good thing because the owner has partnered for growth,” he says. “For employees, usually commission structures don’t change. Plus, health plans at larger companies are often better. Most of the time, it’s beneficial.”