If you own a $5 million home services business, what is it worth?
It sounds like a straightforward question. It isn’t.
One of the most common misconceptions in privately held M&A is the assumption that revenue tells you roughly what a company should be worth.
It doesn’t.
Consider two hypothetical home services companies. Both generate $5 million in annual revenue. Both operate in the same market. Both provide essentially the same service.
Company A produces $500,000 of adjusted EBITDA.
Company B produces $1 million.
Already, they are very different businesses. But even EBITDA doesn't tell the entire story.
Suppose Company A is heavily dependent on its owner. The owner runs sales, approves pricing, manages key employees and handles difficult customers. Lead flow depends primarily on paid advertising, employee turnover is high, and the financial statements require substantial normalization.
Company B has a general manager, a repeatable sales process, multiple lead sources, strong online reviews, clean financial reporting and an owner who spends relatively little time in day-to-day operations.
A sophisticated buyer isn't simply buying $5 million of revenue.
The buyer is underwriting the future cash flow of the business — and the risk associated with receiving it.
Buyers Pay for Earnings, but They Price Risk
Most lower-middle-market transactions ultimately come back to some measure of normalized earnings, often adjusted EBITDA.
But the multiple applied to those earnings can be just as important as the earnings themselves.
A company producing $1 million of EBITDA at a 4x multiple has an enterprise value of $4 million. At 6x, that same $1 million produces a $6 million valuation.
Nothing changed about the current year's EBITDA.
What changed was the buyer's assessment of the business.
That is why owners preparing for an eventual sale should think about two separate objectives:
- Increase sustainable earnings.
- Reduce perceived risk.
Both can create value.
What Creates — or Destroys — the Multiple?
In home services, several characteristics can materially affect how a buyer views a company.
Owner dependence. If the owner is the company's best salesperson, operating manager and relationship holder, a buyer has to determine what happens when that owner leaves.
Management depth. A company with capable people responsible for sales, operations and finance is generally easier to transition than one where nearly every decision flows through the founder.
Lead-source concentration. A business dependent on one lead aggregator, one advertising channel or one referral relationship carries a different risk profile from one with diversified and repeatable customer acquisition.
Revenue quality. Buyers will examine whether recent growth is sustainable, whether margins have been maintained and whether revenue was generated through normal operations rather than unusually aggressive pricing or marketing.
Financial quality. Clean monthly financial statements, credible adjustments and consistent accounting make a company easier to underwrite. Poor financial records introduce uncertainty, and uncertainty rarely helps a seller.
Workforce stability. In the trades, the ability to recruit and retain technicians, installers and other skilled employees can be a significant part of the value proposition.
Reputation. Reviews, brand strength, referral activity and local market position can provide evidence that customer demand belongs to the company rather than solely to its owner.
None of these factors exists in isolation. Buyers look at the entire system.
The Most Expensive Time to Discover a Problem
Many owners begin thinking seriously about these issues only after deciding to sell.
By then, some problems are difficult to fix.
You can explain away a weak month. It is harder to demonstrate a three-year history of improving margins if you started working on profitability six months before going to market.
You can tell a buyer that your new manager is capable of running the company. It is more compelling when that manager has already been doing it successfully for two years.
You can normalize questionable expenses in an adjusted EBITDA calculation. It is better when the financial statements were clean in the first place.
This is why exit planning and operating strategy should not be separate exercises.
The things that make a home services company more valuable to a buyer are generally the same things that make it a better business to own.
Think Like the Buyer Before You Become the Seller
An owner contemplating a sale in the next few years should periodically look at the company through an acquirer's eyes.
Ask:
- What happens if I disappear for 90 days?
- Which revenue or lead sources would make a buyer nervous?
- Can someone independently verify my adjusted EBITDA?
- Which employees are essential to the company's performance?
- Are margins stable and defensible?
- What would a buyer believe has to change immediately after closing?
Those questions often reveal more about potential value than the revenue number at the top of the income statement.
A $5 million company isn't worth a particular amount simply because it generates $5 million of revenue.
Its value depends on how much cash flow that revenue produces, how durable that cash flow appears, and how much risk a buyer must assume to acquire it.
That distinction is where much of M&A value creation happens.