In early 2024 I attended a Home Services conference mostly attended by business owners. I took the chance to ask every owner that I came across if they or someone they knew had received an unsolicited offer to sell their business. Approximately 30% answered in the affirmative. In 2023 that number was maybe at best 5% or 10%. Many of the owners receiving an offer probably thought they were contacted because their business was unique or stood out, however, the reality is that a home services business with at least $2,000,000 in annual revenue is going to be on somebody's radar to acquire. Any Home Services business with over $4,000,000 in annual revenue has a nearly 100% chance if located in a moderately populated region. For nearly every owner, their business is their single largest asset and a potential avenue to generational wealth, so it behooves each owner to take the opportunity very seriously.
What has changed in Home Services for unsolicited offers to start flying around? Is this a fleeting occurrence?
The first explanation for the high number of unsolicited offers is that well-funded professional investors have shifted their interest to the Home Services sector. These financiers belong to the category known as Private Equity ("PE"). A PE firm's core purpose is to earn a return for those who entrust it with capital ($). To accomplish this, PE firms look for business sectors in which they can add value, in turn enhancing sales, margins, and net income which ultimately increases the value for which they can sell the businesses in the future. They first start by acquiring a business to serve as a platform and then utilize this business as the vehicle to acquire more business.
Each of these private equity-backed companies aims to double their business size within 4 to 5 years. Organic growth of acquired businesses expanding at even 10% per year will only bring them so far. There are also some private debt-funded groups also looking to expand to boost the valuation of their company. In addition to the platforms already in the market, we are aware of at least 100 private equity firms interested in expanding their investments into the Home Services sector in the future. These Private Equity Groups complete deep research and even attend conferences, engaging with owners whom they are considering PE investments to be their platform. They are also there trying to get the "lay of the land".
Another reason interested buyers contact Home Services business owners directly is that they are constantly seeking a good offer. Owners of businesses that are not actively "for sale" may be unaware of current market conditions, and as a result, they are likely to be unaware of the true value of their most valuable asset. Buyers are looking to find owners of businesses who may accept valuations from the pre-PE involvement as if they were selling to another small business owner. In such cases, purchasers may offer 75% of the revenue, making the owner happy with the sale while also getting a fair price on the business in yesterday's environment. Yes, the seller is happy, but their business could have been worth TWICE or even TRIPLE what they were offered. We have also seen the opposite occur, basing proposal metrics on what their buddy told them, which also could be unrealistically high for their business, effectively keeping them from accepting a good offer. Unfortunately, in unsolicited offers, both experience and knowledge are typically one-sided to the buyer. The prospective buyers have an infrastructure and team created to complete transactions, perhaps executing hundreds of transactions per year, and the seller is very likely to be a transaction rookie. It couldn't get any more one-sided.
These professional buyers value a business based on adjusted EBITDA, essentially net income, rather than revenue. They are very "calculating" with how they go about evaluating a business's financials. Many sellers are unaware of this process or exactly how buyers calculate EBITDA. For example, putting a valuation on a business that has a 15% adjusted profit margin at 75% of revenue would result in a valuation of 5x EBITDA (15 x 5 = 75). Alternatively, we often see Home Services businesses today valued at a 7-10x EBITDA. In some situations, we have even seen as high as 14x EBITDA. Thus, as you can see, accepting an offer from the first buyer that calls is very likely to result in a "good deal" for the buyer and a "good deal" of second-guessing from the seller.
If you ever receive a call from a buyer who found you online or you respond to a professional email from a prospective buyer, I urge you to take these steps:
1. First, Suggest not engaging deeply with the buyers until you can learn more. Wait to provide them with your business details, especially financials. A very high-level summary of your number of employees, approximate revenue, service mix, etc. is ok for an information conversation.
Wait to provide details until you can understand the situation and how they are evaluating opportunities.
Do not treat buyers as a learning opportunity for two reasons.
Buyers have different philosophies on how they adjust financials. You should have a firm understanding of what drives the business, one-time purchases, special bonuses, and all investments made over the previous 12 and 24 months.
You should be prepared to answer all types of seller questions, and if not seriously exploring a sale, it may be exhausting to you. If you are seriously exploring a sale, there is almost certainly a much better way to run a process.
2. Secondly, ASK QUESTIONS! Ask plenty of questions, write down the answers, and seriously think about what they are telling you. You should consider a call with the buyers to be as much or more for yourself than it is for them. Here are some question ideas to consider.
What do they know about your business?
How did they locate your contact information?
How long have they been around and where is the funding coming from?
How many similar businesses have they bought in the last year and since their existence?
What are their growth plans for the platform and your region?
How do they compare themselves to others like them?
3. Third, invest time to evaluate your personal, professional, and financial goals. And nearly as important, what is your emotional state about selling the business? Here are some key questions that are good to consider.
Would selling now align with your financial plan? What structure would you need to make it work?
What contribution do you personally make to the business, how long could you keep that up, and what would it take to replace yourself?
Is selling intriguing because you want to retire? How long would you maximally be willing to stay?
Is selling 100% or nearly 100% about the money?
If you want to stay on board after the transaction, what would you be looking for in a partner? What role do you want? Be as specific as possible. Are there any absolutely must haves?
Are there any non-starters that you will not accept?
4. Fourth, speak with an M&A expert who knows the market if you want to sell, consider selling, and even if you’d like to just discuss to understand more about the process. At Exit GM, we go over the details and help owners understand the terms of the deal. It is difficult not to be fixated on the finances of the deal, after all this is A LOT of money. However, details matter, also A LOT.
It all matters, the structure, terms, potential holding company equity, representations, warranties, cash percentage, holdbacks, escrow, and more. You get the picture.
It pays considerably to have an experienced professional in your corner to help make an informed choice about a sale.
We also see and hear about the whole market and can provide details that are not because of a single operator. With all of this in our pocket, we can nearly 100% of the time raise the value of the business, sometimes by as much as 50% above the first unsolicited offer. Above all, Exit GM allows sellers to make an informed decision.
About Exit GM: Exit GM is a concierge M&A advisory firm specializing in assisting business and healthcare entrepreneurs. Exit GM levels the M&A playing field for moderate-sized business and healthcare practice owners seeking to maximize the value of the most important asset. Whether through a strategic investor, financial partner, or acquiring additional locations, Exit GM supports entrepreneurs to excel on the M&A playing field.
Comentários