Building Service Contractors Must First Get Their House In Order

When BSCs seek out a sale, the first item up for examination is their service contracts. A buyer will use these documents to evaluate everything from a BSC’s client mix, to contract length and terms, and profitability. They will also weigh a BSC’s profit and loss statements.
 
“When you’re selling your business, those contracts are your assets,” says Herbick. “Your value is based on those assets.”

When evaluating contracts, Graddon says his firm is looking at three things: cash flow, profit reliability and growth potential. 

Fast collections means a company doesn’t have to rely so heavily on working capital. And contracts that span one to two years, rather than month to month, reassure buyers that there will be recurring revenue in their future.

However, low customer satisfaction rates, expired contracts or a narrow client mix could easily make a sale a no-go. If a BSC offers a diverse range of services — or specializes in segments such as environmental services — buyers are more willing to put a value on growth potential. In some instances, buyers will request proof that specific customer relationships are solid.

“If you’re going to put all of your eggs in a basket, they better be concrete,” says Herbick.

Another red flag is when BSCs are too involved in the janitorial company’s day-to-day operations.

“One of the biggest drivers [in a sale] is who holds the key relationships,” says Herbick. “There is no value if the owner is the only one with relationships. You want to transition those relationships to your employees.”

If a BSC holds key relationships with clients, he or she threatens the viability of the business following their departure.

“Our objective is to make companies more valuable, scalable and transferable,” says Graddon. “So that a potential buyer could come in and look at their nationwide enterprise and want to implement [a BSC’s] platform. The more confidence they have, the higher they are going to pay for it.”
 
Although broadening one’s customer base or fostering employee-client relationships is no easy quick fix, getting an honest gauge of the business allows BSCs to identify areas that may need work, so they can revisit selling the business later on down the line.

Get Business Practices In Order

In most cases, BSCs need ample time to clean up their financial operations. Herbick says some BSCs use their businesses like “a personal checkbook” to finance vacations, pay for meals, purchase vehicles, put family members on the payroll and other expenses. Although he says there is nothing wrong in doing so, especially in terms of tax benefits, he suggests halting these activities ahead of a sale.

“When a buyer walks into the business that, at face value, the financials look very different on a recast basis, their antennae is going to go way up,” says Herbick. “We’ll tell the business owner to quit doing all that. Bite the bullet and pay the taxes, and you’ll have a much smoother buying process.”

That’s because buyers will often request a 12 to 36 month “look back” at a BSC’s financials.

“If you just started making changes last month, you’re going to have an uphill battle,” says Herbick.

Other areas to look over include employee verification processes, hiring and recruiting, timekeeping, equipment and labor costs, marketing and advertising, staff safety and training — basically any and every facet that touches the business. All of these areas play into a company’s ability to spur business value enhancement.
 
M&A firms use a variety of rating systems and evaluations to help BSCs determine where they stand with the competition, and create a detailed plan to help them make the most of their businesses.

“You see the business through the lens you built it in,” says Herbick. “That’s not the same lens the industry sees your business through. It’s all about optimizing your business.”