What Is EBITDA? How to Value, Grow & Sell Your Home Service Business

What the hell is EBITDA?

EBITDA, daddy, let's do it.

It is probably the most important number in your business because when you go to sell your business, this is how you value it. Also, when you go to get financing.

You wanna go and get these items and get these lines of credit and get these financing availabilities when you're doing well and when your EBITDA looks good.

Eventually your vendors, your banks, your lines of credit, your credit card facilities, like if you are able to build a big enough business, you will have to display this.

No, I agree.

What's a healthy margin, Jack? Welcome back to Owned and Operated, a top 150 business and entrepreneurship podcast. Got through that. I'm your host, John Wilson, and on this show we talk home service. We talk about the industry. We talk about our business. We talk about buying some businesses, starting them. Today I'm joined by my Frequent co-host Jack Carr, welcome back to the show.

Welcome back to Owned and Operated.

I don't know why I'm just doing that. I don't know why I ever do the intros. Yours are better than mine. All right, before we dive in, quick pulse check. How we doing?

Pretty solid. Uh, we did awesome this summer. We are on track to double, 7 to 8 million. Yeah, which is just a quick freaking The doubler. He's the doubler, which is awesome. Like it just feels good. Yeah. If we just match numbers for last year, it's like hey, we're like 6.3, 6.5. Like it's crazy with zero growth.

Yeah.

So really pumped on that. Yeah. It's still hot in Tennessee. Really hot. So board's still full.

That's crazy.

But it is what it is, man. We're and then like all the I'm hoping weather reports are right. Like all the modeling and everything. People with the super El Niño is like Tennessee's supposed to get more snow and ice than ever before. And I'm like, please just destroy everything where I live. It's so terrible. Just the converse relationship with the weather.

It really is. HVAC makes you— HVAC makes you nuts. Um, September's been a good start for us. Uh, August was weaker than we would have liked, uh, but shoulder season started seemingly early in, um, In August, also all of the like sort of big like PE groups around us started doing their like break-even. Cleveland, I think, is a unique HVAC market compared to other parts of the country. So like it would be actually really interesting. I got to get somebody out with like industry data, either a wholesaler or Service Titan apparently has this data, and they they. occasionally give it out. Um, but they'll tell you like, hey, this city grew or didn't grow. Uh, which is good because they have all the, all the data. Uh, which is kind of funny. But, um, it'd be interesting to see in like some markets how they've responded because like Denver 2 years ago, everybody in Denver said it was just like a bloodbath.

And they said that again, actually going into this year, which is wild. Yeah.

But Denver this year seems to be going better. Like the guys that I know in Denver are like kicking ass.

It's going a little better, but it's still like, was it—

it's still been like super— Well, they had no winter. They had no winter at all.

No winter again.

Yes.

Yeah. So it's just wild in there.

Yeah.

But yeah, no, I agree. Denver has been a hit or miss market where like some seasons they just get absolutely killed.

Yeah. Cleveland anyways, to my point, Cleveland's been kind of interesting. And what I use as a metric is what does like Sila or Apex or Heartland or any of the bigger aggregators do. What does their pricing look like at their branches and how fast do they go below breakeven? So anyways, first week of August, everybody's below breakeven. So I don't know what data they're using. If you're working at Sila, let me know because I'm actually kind of curious how we determine To go below? Like, at what point do we decide to do that? So, yeah, kind of.

I think, I think that there's, there's some stuff that you can do and we should look into it a little bit more where there's tools online now where you can see it, like you can pull data from Google to see the number of leads that are being sent to certain businesses. And so you can actually look at entire markets by kind of lead volume. Which I find interesting. Really?

Who's that?

Yeah. Uh, I have to look. I, somebody sent it to me. I haven't dug in. So like, this is half baked. I have not dug into like how the software actually works, but that was the pitch that they sent me. So I'll dig in and, and release that. Maybe it'll be down in the, the show notes.

Yeah, that's really interesting. Yeah, that would be interesting. Um, okay, cool. Today, uh, well, before we get started, um, I think I'm supposed to shout out Breaking 5, but like we sold out and it's next week. So maybe Catalyst. Yeah, yeah, yeah, you're right. We're not doing a Breaking 5 next spring. This, this Breaking 5 was actually kind of fun. Um, maybe this is just because we're doing the 5th, like this is the 5th or 6th one, but like I think we sold out like a month ahead of time. So I don't even know what they're doing with people that, because people keep signing up, but usually there's like a, hey, come in 6 months. Uh, but in 6 months we're doing Catalyst. Uh, should be a ton of fun. Check it out at ownedandoperated.com. It'll be a bigger event, much larger than Breaking Five. We're gonna have some great speakers, probably some great food. Uh, Jack will be doing bodybuilding sessions.

Yeah, yeah, yeah.

Here's a good one.

It's, it's still in between though, like some of these big events where you don't have that connection, you're not gonna get to walk through the site. Like, yeah, they're still gonna get to see your, your warehouse and your shop and there's a shop tour. So like it has a lot of the cool aspects of Breaking Five, But with a lot more of our friends here who are speakers and bigger businesses that can talk about it. So really cool event. I'm super pumped for it.

Yeah, no, should be, should be tons of fun. Most home service companies don't stall because of demand. They stall because they run out of good people. Finding solid help fast is hard, especially in this industry. And that's where QuickStaffers comes in. They help home service companies build reliable virtual teams that actually understand how the trades work. Quick Staffers provides vetted remote staff who are already trained on ServiceTitan and use proven SOPs, the same ones that I use at Wilson. These are VAs you can plug in from day one to handle customer service, lead follow-up, scheduling support, and a ton more. They've been a huge help in scaling my team without the usual hiring headaches. Check them out at the link below. This will be potentially one of the most boring topics that we've ever done as far as content. So, so Jack will be doing his best to spice it up for all of us. But if you listen, this will be the single most valuable episode that you have ever listened to on Owned and Operated, because this is going to tell you how to get full value for your business when you sell it. So what we're talking about is what the hell is EBITDA? EBITDA.

EBITDA. Let's do it.

Yeah. Or EBITDA, depending if you're talking to someone from Manhattan. They love calling it EBITDA.

Do they really say that?

Yeah.

That's weird.

Yeah. Well, it's interesting because different sections of like the finance, like the guys from Chicago say it slightly differently from the PE guys from New York.

Oh, damn.

And I do think it's a graduate school thing. Like, where did you get your MBA? Well, how do you pronounce EBITDA? That's how you know. Oh, he's an HBS kid. Got it.

Yeah, exactly. So what does EBITDA actually stand for, John? Let's start at the basics.

Yeah. So EBITDA.

Which is how we're going to refer to it.

DA. Yeah. And so that's how, that's how you know that I was a plumber. That's my graduate school. All right. EBITDA is earnings before interest, taxes, depreciation, and amortization. It is probably the most important number in your business because when you go to sell your business, this is how you value it.

Like, not only sell though, it's also what the numbers they look at for—

Banks look at it for financing, for financing cars, for everything.

Like, this is a big portion of, of like any type of institutional money or capital that you'll ever try to get. Yes, this will come into play.

Yeah. And it's, uh, so it's a way to measure profit. So when you're looking at like net operating income at the bottom of your P&L, uh, you subtract things for tax like depreciation. So like your vehicles, you depreciate them over time, your interest payments, um, taxes like sales tax, or Ohio's got a cap— CAT tax, uh, program. So you pull those out as well as like capitalized expenses. If you're going to buy equipment or tools or computers or whatever, you pull those out and you display EBITDA. And the difference is kind of a lot like your net income could be 5 to 10% and your EBITDA could be 15 to 20%. Like it can be a really big difference. And basically just to like sum this up, because actually I have this conversation almost every day with people that we're talking to about buying their business. They're like, well, what is it? When you sell your business, this is the number that the buyer is expecting to pay. So if they pay off your vehicles and so there's no more debt, then the interest payments go away. If they, you know, they're gonna restart the depreciation on the vehicles, but like that depreciation is yours for your tax. So they're expecting that cash flow to come from your business post-close. The reason they use it to value is because depreciation is a non-cash expense, which I think is arguable. But like, that's the reason. That is the— that's the why. And interest is a non-tax or non-cash expense post-close because it goes away.

So real quick, though, there's a lot of small operators, right? They may have bought their first business or whatever that they have probably heard SBA Or they're running off SDE numbers rather than EBITDA, because in the lower, lower, lower middle market, including myself when I originally bought, it was a multiple of SDE. And so they might be familiar, but what's the difference between SDE and EBITDA?

Usually just owner salary. Yeah.

Seller discretionary earnings, owner salary, owner's personal truck payment that he's been doing.

Yeah.

Phone things that, you know, his wife's car, the things that are going to be a benefit or cash flow back in the business once he is gone.

Right.

He or she. Right. That being said, why is SDE not a good measure of some value in your opinion?

I mean, it depends on the business, but usually like the owner needs to be replaced.

Bingo. So that— I mean, that's where I was going with it is the same thing is like a lot of times SDE becomes extremely inflated because they say, well, I pay myself, you know, a bajillion dollars. Yeah, $200,000. So I can add all that $200,000 back. Yeah, but I still need to go back in and now I need to hire an operator or manager level or whatever. And eventually, yep. That gets eaten up anyway. So EBITDA is a much, much better metric to measure valuation off of.

I agree. I think when you're going to— so I'm going to click on something we said earlier. When you go to sell, but also when you go to get financing, just so people understand the why, because then we'll talk about what's good, what are people looking for. Even if you're listening to this and you're like, I never really want to sell, or that's not currently on my brain, Eventually, your vendors, your banks, your lines of credit, your credit card facilities— like, if you are successful, which I hope every single listener is, and if you are able to build a big enough business, you will have to display this. Like, we started having to give some of our vendors quarterly financials because they were looking at EBITDA, they're looking at free cash, they're trying to understand the business. Well, hey, we now— like, we've extended Wilson Multiple 7 figures of credit on 30, 60, 90-day terms. Like, we have to know that they can repay it. So they underwrite you to EBITDA. They want to know your debt. They want to know the full financial picture. Are you running a good business? Um, which, when you're a smaller business, you're not used to showing, or at least I wasn't. I wasn't used to displaying my financials to freaking everybody that moves. But you sort of end up having to do it really often, to be honest, because more and more people have to know because you've been successful and the business now does $50-whatever million a year. And these vendors have offered us a lot of money and credit. So we have to show them that we are creditworthy.

And again, it's something to get a hold of early just because the sooner you get this financial acumen, Like the better it is to be able to have that ability. Because like we've said, we've said it on the show 100 times and I'll say it again, is you want to go and get these items and get these lines of credit and get these financing availabilities when you're doing well and when your EBITDA looks good. So then the next year when it maybe doesn't look as amazing, like that's when you pull on your line of credit. That's when you have the ability to pull on extra financing for the short term when you actually need it, rather than doing like a— What is it, MSA or merchant service?

Yeah.

Loan or whatever those things are. Like you want the best financing available.

Yeah, no, I agree. Yeah. Access to capital becomes like a huge growth constraint.

Huge growth constraint.

What is good EBITDA?

What is good EBITDA?

What is it? What is it? What's a healthy margin, Jack?

Healthy margin. And so this is where it gets interesting because profits and EBITDA are vastly different, right? I've always heard Okay. And I would— we always tried to shoot for was 10% net, 15% EBITDA.

Okay.

Did we ever hit that is another question. Usually we came in about 6 to 8% net and probably 10 to 13% EBITDA historically. That is for a high-growth, lower-size business. Not terrible in my opinion, but when you optimize the business, obviously it gets a little bit better.

I'm actually looking at mine right now, or I'm trying to.

2024 though, let me tell you, we had negative—

no, just kidding.

It was 2023.

What was the EBITDA? It has eluded me. All right. Um, are—

I mean, what's the rule of thumb though? Is there a rule of thumb?

Yeah, so rule of thumb, it— I mean, good is 10%. Uh, great is 17 maybe.

Mm-hmm.

Um, like 15 to 20. Yeah. Holy shit, that's crazy is like 25.

25.

Yeah. So for us, it's like variable by month. I actually— I can't pull year to date by percentage. I guess I could pull year to date and just do the percentage, but, um, August was a low month for us at 16 And that is a low EBITDA month as a percentage. Year to date, we're in the low 20s, like 22 to 23, um, which is really good. Like, to be honest, like, that is really good, uh, and we are proud of that. We're excited about that. But, uh, I, I would think that you should be aiming for 15 at a minimum. Like, for years we had a 17% EBITDA target. Similar to what you just said, like we didn't hit it until 2025, uh, but like we got closer every year and we advanced towards it every year. And today, like, which is kind of funny, like I'm disappointed if we hit 17%, and that was a target for like 5 years. And now it's like, oh God, 17%.

Like, oh, just—

what did we— where did we completely whiff?

Yeah.

Yeah. Uh, which is, you know, that's a fun change. Uh, but Yeah.

I mean, so, I mean, I think there's an important portion of this though, is like, that's a pretty big differential because your net's probably much smaller, right? Because your net's going to be your cash flow at the end.

Yeah. So net is $13.3 million.

Okay.

For August.

So I mean, that's a, yeah.

It's a 3% delta.

5-point difference. 3% delta?

Yep.

Yeah. So there's a healthy difference in there. What is that like? Where's the, how much of a differential should that be normally?

Is it— I mean, are you—

3% not bad? Is it 7% weird?

It's hard to say, uh, because I mean, so much of it's like, how much debt do you have? Did you— because if there's depreciation, is there amortization from like buying these companies and goodwill? Did you get there purely organically? Like, if you're just an organic, uh, business, no M&A, like there might be almost no difference at all, just vehicle depreciation. Yeah. Um, so it really like, what's the story of the business? So it's hard to say, like 10 points could be totally normal. My 3 points could be totally normal.

Yeah. There's always going to be a few points, the difference because of things like interest as well, though, correct?

Taxes and interest.

If you have debt, yeah.

I mean, there's a lot of people that have—

Well, taxes is not debt.

Yeah, yeah. There's always going to be something. There's always going to be something.

But depending on how much debt a business has and how much they're amortizing and how much capitalization they're doing, that changes. Great conversation to have with your CPA, by the way. Yeah, we had ours too late. Definitely have it earlier than you think you should.

Yeah. Yeah. So I think like what's good, 17 to 20 is like awesome. 15 is a good target for most companies. And I would say that that's for most companies at scale. Like we're 50, you know, like that's where we're at scale. If you are sub-$5 million, I don't think you should be that concerned about EBITDA unless you're prepping to sell right now. Like a 20 or 30% EBITDA, look, you should just grow the business is, I think, like what, what would have a greater outcome for you. Like you should run a healthy business, like don't run that thing down to zero. But I wouldn't be worried about like a 30% EBITDA because like we've seen I mean, I've seen some companies on market and they're like, yeah dude, we have 30% EBITDA and it's, you know, we do $7 million of revenue. So, you know, EBITDA is like 2 or 2.1 and they're looking for like a 9 times on that. And it's like, dude, no one's giving you that. Like, that's crazy, uh, for your size of a company. And it's because they just over-optimized on EBITDA thinking that, um, like that was the right decision, which like it wasn't. Maybe if they continued to own it for a long time, that'd be awesome. But now's the sale. That is sort of my next point here.

What are you going to say?

So with, with EBITDA and revenue, um, $1 million of EBITDA, the way to think about it is $1 million is a big threshold. So the greater your EBITDA, the higher a multiple you get when you sell your business. There's some of the largest transactions in our industry, one just happened at 23.5 times, which is pretty cool, uh, but most of them are like 18, 19, 20. So on the high end, that's the multiple that could be achieved if you're like $100 million plus of EBITDA. If you're doing $300,000 of earnings, then you might get a 2 to 3 times. So like, that's sort of the difference. You know what is kind of funny and interesting is sometimes I like comparing public companies as, uh, like what multiple are they trading at versus what multiple do plumbing and HVAC companies trade at. So just for perspective, Yeah. Lululemon, whose pants I wear every day, is currently trading at an 8.2. Uh, now, great, they're not doing well, but it is, it is kind of fun. It is kind of funny. Uh, Nike is also trading at like, you know, and I wear Nike shoes half the week, and they're currently trading at like a 15. So yeah, it is kind of funny to compare. Um, but yeah, so if you're a million of EBITDA But you're a $2 million revenue business, your million of EBITDA is not worth like market multiple because it's 50%. It's not realistic. Somebody is going to have to reinvest a ton into that business to get it to be better. If you're a million of EBITDA but you're on $20 million of revenue, that's a really attractive opportunity for somebody because that is very low performing. That's 5%. And they— someone knows that they can walk in and they can make that $2, $3, $4, maybe $5 million of EBITDA. with some changes, maybe it's cuts or price negotiations or sales training or whatever, but they know there's a lot of opportunity there. So $1 million of EBITDA is worth different amounts depending on the size of the business.

And that's a balance too, because obviously, right, a $20 million company with $1 million in EBITDA, like there's issues in that business, which also throws up red flags to buyers and saying like, hey, why are you running a 5% EBITDA and why are you selling? Like optimize this a little bit and then exit.

Yeah.

So it is definitely a balance. Again, shooting for that 10 to 20%, I think, is much healthier. $20 million with $2 million in EBITDA is a lot like— will get a better multiple most likely than $20 million at $1 million.

Yeah.

Even though I just want to be very clear on that. Like, it's not necessarily the fact that it's lower. It's, it's the fact that it's within that healthy range where it's optimizable, yet still has the size necessary, the revenue necessary to gain that.

I've wasted a lot of money on marketing agencies that made pretty reports but didn't make the phone ring, and that's why we use Service Scalers at Wilson. They work exclusively with home service companies and focus on what actually drives leads: PPC, local service ads, SEO, Google Business Profile, and everything you need to get in front of homeowners who are ready to book. The best part is that you know exactly where your money is going and what's producing real jobs. If you're ready to stop guessing and start getting better leads, head to the link below. Book a free strategy call and let them know that owns and operated sent you. EBITDA is not the only thing that matters to a buyer, and this is something that I've seen a lot of. Like we have conversations like this where like hey, EBITDA is the most important number. Like EBITDA probably is the most important number. There are also other important numbers though, but like it's weighted, right? So like let's hey, fifty to 70% of the value of your business is probably EBITDA, but that last 30 to 50 is still a lot of percents, right? So like, hey, what's the revenue? What's your headcount? What's your turnover rate? What's your average ticket? What's your conversion rate? What's your gross margin? Like, if you're a million EBITDA business at a 20% gross margin versus a million EBITDA business at a 50, those are totally worth different amounts of money. So the, the qualitative of are you running a good business Are you effective? Are you serving the right customers? Do you have good Google reviews? Do you have a lot of Google reviews? Like, all of that stuff does matter when you go to value the business.

What should people be looking— I mean, should even people be looking for, like, what should they be focusing on to drive EBITDA in their business if they're thinking about this for the first time?

Gross margin is like basically the way to start. Like, In plumbing, HVAC, and electric, you have to control your gross margin. You should be above 50%, and then you control your SG&A. But gross margin is what's your labor, what's your material, what's your equipment, what's your commissions, what's your rebate program with your OEM. But you wanna be north of 50% gross margin, and then you wanna control your SG&A. For Wilson, we like a 50/30/20. So 50, uh, 50% gross margin, 30% SG&A, and, uh, 20% EBITDA. That's like a good, you know, mark for us. Obviously we try to beat that. Obviously we're in the low 20s, but that is like the how we think about it.

Well, it's— yeah, such an easy rule of thumb.

50, 30, 20, baby.

Just— yeah, 50, 30, 20.

Yep.

Sweet, sweet.

All right, thanks everybody. I hope you got a ton of value out of that. Bookmark it, listen to it once a quarter, be reminded That your business sells off EBITDA, not revenue, and revenue only matters if your EBITDA is like overinflated.

Great way to end that episode, dude.

I've seen too many deals. I've seen too many deals. Yeah, we have 70% EBITDA.

Highly personal right now.

Yeah, there are actually three specific people that I'm thinking of right now. All right, thanks everybody.

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