Long considered too difficult to scale beyond their natural geographies, residential service companies like plumbers, electricians, HVAC technicians, roofers, landscapers, garage door installers and pest control technicians rarely attracted the attention of private equity funds and their sophisticated managers. However, rising demand and advances in technology have created a compelling investment case for operating collections of these small businesses under a unified corporate structure.
“It’s been the intersection of a number of macro trends,” said Kevin Gramza, a Boston-based investment banker with Raymond James Investment Banking. “During the pandemic, it began accelerating. People found out what truly was or was not an essential service. Meanwhile, homeowners were spending more time at home and started noticing things around their house that bothered them.”
Feeding into that, more Baby Boomers are opting to age in place, and generally becoming more willing to pay for services they used to perform themselves. Getting on a ladder and cleaning the gutters starts to seem irresponsible at a certain age, so it makes sense to pay someone to do it.
Generational shifts have also contributed. Millennials are generally less eager to spend their weekends on DIY projects than their parents were.
“Your two largest groups of homeowners are increasing the velocity of demand,” Gramza said. “Couple that with tech that has enabled multi-geography management and you have both the demand and the manageability that make the economies of scale attractive for private equity investors.”
What private equity likes about residential services
The case for investment is simple: Residential services are growing faster than the gross domestic product of the overall economy. As high cash flow businesses, the balance sheets are relatively attractive. Capacity is easy to add as demand grows. And once consumers find a plumber they like, for example, they tend to be loyal.
While each private equity fund will have its own approach, instead of trying to change the fundamentals of a successful small business, many will instead seek to augment their winning formulas. They’ll often leave the branding and staff in place, but bring expertise in digital marketing, financing, business data analysis and resource allocation.
Assembling enough businesses into a portfolio to make it worthwhile is one of the major challenges, and each fund will have its own acquisition and management strategy. Some may seek vertical integration of multiple types of services in a small number of local markets while others may focus on one type of service across a large number of markets. There are those looking for fixer-uppers, but most funds want businesses that are premier providers in their market, making them strong foundations for growth. Investing in growth both by expanding operations within existing branches and establishing new branches is an important part of the growth strategy in addition to acquisitions.
As an investor, assessing private equity offerings is complex because each fund comprises a different strategy, different holdings and different managers. Even seemingly similar funds can have vastly different outcomes. Before investing, it’s a good idea to consult a financial advisor with institutional due diligence capabilities.
What business owners should consider
All this new investment and interest is changing local market dynamics.
As a business owner, there are two major things to consider:
- If and when you want to sell your business
- How you can position yourself to compete
On the sale consideration, there are many active buyers looking to expand their private equity portfolios. Before accepting an offer, investment bankers would generally advise you not to sell your life’s work without consulting with an experienced professional, someone looking out for your best interest. This may be a financial advisor with a specialty in business exit planning. They may also connect you with a suitable investment bank to represent your side of the deal. Creating competition between potential buyers is often beneficial, but a professional will be able to help you determine if the motivated buyer at your door is the right one.
If you’re not ready to sell, it’s still a good idea to create an exit plan for when that day comes. Some questions to answer include:
- Do I want to sell my business or name a management successor?
- What is my timeline?
- If I do sell, how involved do I still want to be and for how long?
- Until that day comes, what is my plan for building business value?
Even though you are an expert on your business, financial advisors, business planners and investment bankers may have insight about building your business’ value that aren’t apparent from your vantage point. What makes a successful business and what makes a valuable business are often aligned, but not always. The needs of an investor can be somewhat different than an entrepreneur-operator. Incremental strategic decisions can go a long way toward checking the right boxes to build more value in the eyes of a private equity buyer.
If you don’t want to sell, you may find yourself eventually competing with a private equity portfolio company backed by hundreds of millions of dollars. This can be a tough situation, but as a local business owner you can lean into your local knowledge and relationships while filling in the same gaps that private equity identifies in the businesses it buys – things like digital marketing, scheduling technology and expanded service offerings. With the rise of investment in residential services has come an increase in services to business owners. Off-the-shelf technology suites purpose-built for businesses in your field now exist that can help you address each of your potential business gaps.
Starts with a plan
Change comes to everyone, and opportunity with it – at least to those prepared to receive it. This is why as an investor or a business owner, it’s important to be ready when it does. Know what you want to achieve, come up with a reasonable plan to pursue it and judge any single offer against those ideas.
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