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  • Selling a Service Sector Company for a Premium Value in 2020

    Jul 14, 2020

    The business models historically employed in the hospitality and retail industry sectors have been forced to adapt and evolve in 2020 due to COVID-19. This evolution process makes valuation of companies in these industries presently difficult as future customer demand and operating costs have multiple variables to solve for without historical information.  This ambiguity has resulted in a migration of business buyers from these industries to the service sector in the business brokerage marketplace. This increased buyer demand is resulting in multiple offers and strong market values for service businesses in the Pacific Northwest.

    IBA has been recognized as a market leader in Washington, Oregon, & Alaska for sell side representation of service companies with high goodwill components of their sale value for numerous decades.  Our activity successfully facilitating deals in this space slowed down, but did not stop during the COVID-19 “shelter in place” period.  In the last two months, IBA has successfully completed transactions involving service companies providing boat repair, home theater installation, and local retail delivery of floral products.  In addition, we have companies in escrow pending sale involving businesses providing commercial, consumer, and government service to both new customers and existing reoccurring customer relationships.  None of these companies sold at discounted values versus what they would have sold for in Q1 pre COVID-19 shutdown.  Buyer demand remains high in the service sector and IBA is actively looking for business owners with successful business models that are looking to sell in 2020 to take advantage of the strong market demand and attractive values available in the market place.

    The following are a few of the reasons why strong market demand currently exists for service companies:

    1. Proactive versus Passive Customer Engagement – One problem with a traditional retail business model where people visit a merchant is that an entrepreneur can only cultivate customers within a limited geographic area. Think of where you shop for groceries or gasoline.  My guess is that you commonly frequent locations within a few miles of your home unless there is a compelling reason to drive past your neighborhood options to visit similar businesses requiring longer travel times.  The advantage of a service business is that instead of waiting for someone to walk through the door, many service businesses have the option of traveling and engaging at their customer’s location.  This is true whether it is a residential focused business like landscaping, painting, HVAC, roofing, or septic pumping or B2B services like servicing machines in hospitals, electrical & refrigeration repair for the fishing industry, or building IT infrastructure.  All of these examples involve business models where IBA has valued and facilitated deals for clients in the past.
    2. Flexibility – A second attractive feature of service sector businesses is the flexibility of the business model. A service sector company has the ability to pivot their business model to where customer demand is found fairly rapidly.  Pathways for successfully pivoting can include an opportunity created by a lack of service providers in an area, the exit of a service provider from an area, or increased marketing into a new area or customer group.  Service companies are also well positioned to pick up available personnel talent in the marketplace due to being laid off or a lack of demand for a service in an area.  An example is employees serving the hospitality industry, closed restaurants do not need laundry services for uniforms or someone to service their equipment.  These employees, like all of us desire to work and support their families, welcome opportunities where they can train & transition back into being productive members of the economy.  A person who serviced refrigeration and air conditioning in restaurants has the ability to install air conditioning units in homes with the appropriate mentorship and support.
    3. Limited Ability to Outsource – Many services cannot be done virtually. They require local, trained “boots on the ground”.  This requirement translates into limited threats to a business model from overseas, areas in the country with lower labor rates, or companies like Amazon that are damaging local retail businesses by offering delivery of products that could have been purchased within a couple of miles of the customer.  The fewer the external threats to a business model the less risk, the less risk in a business model the higher the multiple of EBITDA and sale price.
    4. Current Acquisition Capital Options – Many businesses acquired by buyers with enterprise values of less than $6,000,000 employ acquisition capital obtained using a Small Business Administration backed loan. Currently, programs exist where the first six months of principle and interest payments for SBA loans do not need to be repaid.  The programs exist to motivate investment in privately held companies and family owned businesses.  On a ten-year loan for $3,000,000, this program results in approximately a $200,000 price reduction for the buyer if the deal closes before the expiration of the present window of opportunity.  This unique time & place opportunity is motivating many business buyers to get their deals done ASAP.  They look at the present economy and commonly say “it is not if we return to pre COVID-19 levels of economic activity, but when”.  The rewards in business have always gone to the risk takers and people of action.

    IBA has experienced, knowledgeable, highly skilled business brokers in its service sector transaction division team.  If you are interested in learning what your business is worth and the process associated with selling a business, we would welcome the opportunity to provide an overview of our services.  100% of IBA’s fees are performance based and paid by satisfied clients upon successful completion of their sale.

    IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.

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