What M&A Buyers Look For in a BSC
One of the reasons I love the building services industry is the people who work in it every day. The nature of the work, the visibility of the service, and the high degree of interaction with colleagues and clients fosters a culture of integrity and good values that is paired with a pragmatic approach to work.
When the owner of a building services contractor company is ready to sell, their motivation can be driven by a wide range of factors. Retirement, fatigue, a change in life circumstances, or simply the desire to do something else. Whatever the case, the business owner reaches the stage when they are ready to monetize their hard work. So, what determines the level of interest their business will receive from buyers and the value buyers are willing to pay? What do buyers typically look for and what enhances and detracts from value?
Buyers look for tangibles and intangibles in determining their interest in, and the valuation of, a business. The main tangibles that influence the level of interest and value include company size, financial results, the degree of client concentration, the end markets in which the company operates, and the strength and depth of the management team. Intangibles that have an effect include a company’s reputation in the market, quality of the business, and the culture within the business. There are, of course, many other factors that may influence the buyer decision making process, but these are some of the main items.
Let’s address these one at a time. Company size is the single largest determiner of value. Larger companies typically trade at higher multiples of earnings for a variety of valid reasons. A bigger company means higher customer diversification, a larger management team, and greater stability in cash flows, which all serve to reduce risks for a buyer. Lower risk means a buyer will be willing to pay a higher multiple for a business, all else being equal.
Financial results that are within industry average norms or higher than average suggest that a company is being operated at least as well from a financial perspective as its peers. Profit margins that are too low imply a company is not performing as well as it should, which raises a risk, as do profits that are abnormally high which causes a buyer to question the degree of sustainability.
Having a large percentage of revenue with 1 or 2 clients, say 25% or more with one client, also raises a risk for a buyer. This can lower the multiple a buyer is willing to pay or cause them to include an earnout structure in their offer which essentially ties payment of a portion of the purchase price to the retention of concentrated clients for a set period of time. The end markets in which the company operates affect value as some end markets are simply better to operate in than others.
In the janitorial space, retail and shopping malls tend to be the most challenging markets as pricing is usually a key factor for clients and slip-fall risk is often borne by the service provider. Businesses concentrated in challenging end markets will have higher perceived risk and hence lower valuation multiples.
Finally, we come to the strength and depth of the management team. This item is buyer dependent. At GDI, we are only interested in an acquisition if there is a strong team remaining in place post-acquisition that we can partner with and grow with together. Many buyers share this philosophy, while others will prefer to take over management of a business and operate as they see fit.
The intangible factors don’t have a quantifiable effect on value, but they can have a significant impact on a buyer’s level of interest and the multiple they are willing to pay. A company with a strong reputation, a high degree of overall quality within their business, and a healthy culture implies strong client relationships, good levels of profitability, lower employee turnover and healthy revenue growth – which all point to a reduced risk for a buyer. Lower risk equals higher multiple.
When considering the sale of one’s business it is also important to know there are different types of buyers in the market. Financial buyers, like Private Equity funds, are typically the most growth motivated buyers in a market as they have finite time horizons within which to grow their investment before needing to sell and need to return funds to their investors after a certain period of time. Strategic buyers are operating companies in the industry or a related industry who tend to have a fixed base of capital and take a longer-term approach to growth through acquisition. Financial buyers and Strategic buyers each hold a different value proposition to a seller and each buyer will have a different approach in their post-acquisition operating strategy. It is important for an owner to understand what they want to achieve out of a sale in addition to monies received.