How to sell your home service business for the most money

Welcome back to the show. I'm your host, Phil Risher. And on today's episode, we're going to be discussing building and selling a home service business for maximum value with Patrick Lang. Thanks so much for joining us today, Patrick.

Absolutely. Thank you so much for having me on.

For sure. So Patrick Lang is a seasoned business broker and the owner of Business Modification group, specializing in H Vac, plumbing and electrical company sales. With over 136 transactions closed, he's the guy you want to talk to when it comes to maximizing the value of your company. Patrick's expertise lies in preparing companies for acquisition, structuring profitable exits and connecting sellers with the right buyers. He also works with 1 to 10 million home service businesses, which is our bread and butter who listen to this show. So it's a perfect fit. Can you tell us a background? Like how did you get into this selling home service businesses?

Yeah, absolutely. So it's a long, winding story. So I, I come from a financial planning background initially and it just wasn't fun anymore. So I, I sold that business. And some people have a midlife crisis and buy a Corvette. I bought a swimming pool service company, actually. Wow. And so we started cleaning swimming pools and we did that for probably five years through, grew a big business. And along the way I bought and sold and grew and acquired. And when I sold that off, I, I met a business broker. And I didn't even know what a business broker was right. I'd sold, I sold five, four of my own companies. Probably at that time had bought five or six companies. I didn't know a business broker existed. So met a business broker, told me what he did. I said I could do that. I've been doing it for myself, I can do it for others. Became a business broker. And that was probably 13 or 14 years ago when I entered the brokerage world and I sold everything, right? Bars, restaurants, gas stations, flower shops. You name it, I sold it. Wow. And I listed a heating and air company for sale. And I love businesses with barriers to entry. I love home service. I live in Florida. I don't know a husband dumb enough in the state of Florida to tell his wife he's not fixing the air in the summertime. And I thought, what a great opportunity. So I bought the company I had listed for sale. I ran it for two years and realized I missed the business. Brokerage world was part of it. And, and, and, and it probably wasn't great for me or for my employees for me to have a business where I relied on employees again. I, I come from the, the world where you're just happy to go to work and you don't have to coddle people and beg them to go to work and pay them a bunch of money and tell them how sweet they are and all the things they've got to do. I came from this different background I guess. So I went to sell the company and I was still doing brokering along the way. Not in a major capacity, but still doing it. And when I went to go sell it, we were a small company, under $2 million in sales. I realized if you were doing $20 million, people would line up to help you. If you were doing 2 million, I couldn't find anybody who knew anything about selling it. And I thought, wow, as a broker, if I can't find information, what is somebody going to heating an air guy for 30 years going to be like? So right at that point, little over six and a half years ago, I thought there's an opportunity here. My son and daughter in law actually bought me out of my heating and air company. Okay. So they run it today. My office up until probably six months ago was still in their office. So they got my unsolicited advice every day, which I'm sure they loved. And so, so I was still around the business and based in Florida. First year I sold a few in Florida, then some in Georgia, then the Southeast. And Covid was for many people, the trades. Covid was good and it was good for my business too. I could fly from Florida to LA round trip for 200 bucks. I was the only guy on the plane. Every seat was first class, every hotel was wide open, every rental car was open. So I started, just became nationwide and started traveling. It seems like I live on a plane now but. And I've been fortunate in the last six years, if you mentioned, I've sold 136 companies and we've been fortunate to stay busy. Wow.

So very cool story because you have been on both sides of running a home service business, trying to sell a home service business running into the pitfalls. And so it probably comes pretty natural for you to discuss the topics when you meet with people. It's not just some financial guy who's just looking at EBITDA or something like that.

Yeah, I think that really makes a difference. Right. I've, I've been in all three phases. I've bought, I've ran and I've sold. And so, and the reality to me, selling a business, to me the numbers are the easy part, right?

Yeah, yeah.

They mathematically makes sense or it doesn't. So if it doesn't, you don't sell it. It's just that easy. To me, it's everything else that comes with it. And so many people, their business is their baby, you know, and they don't, they don't have any hobbies, they don't know what they're going to do. So there's a lot that goes into that.

Yeah.

With all the financial buyers who've entered the marketplace, there's. The deals have changed. Right. My first two years, every deal I did was mom and pops buying other mom and pops. My next two years, almost every deal I did was a financial buyer or private equity company gobbling them up. And now the last two years it's been a split. So probably half of my buyers have been financial buyers of some. So. And the other half are mom and pops buying other mom and pops, kids buying out their parents, employees buying out their boss. So there's a little bit of everything.

Yeah, very cool. So with these home service business, let's say 1 to 10 million, what are some things that they should be doing now to prepare their business? Like common things that you're like, okay, you gotta solve this, you gotta solve this. That way you're ready to roll whenever you do decide that you want to sell the company.

Yeah. You know, there's four things I kind of preach about. There's a lot, a lot more than that goes into it, but really four main things, and that's one, getting themselves out of the band. So most of the companies that I see that are stuck at a million dollars or less in sales is because the owner won't get out of their own way. They're the best technician, they're the best salesman, they're the best bookkeeper, they're the best, best, best. And I don't have any buyers that call me and say, hey, I want to buy a business where I can work in the field for 16 hours a day and then go home and do paperwork. Right. It's a high paying job, not a business really. So getting out of their way. The second is a business built on service and repair as opposed to new construction or project based work. Holds a higher value, more consistent, deeper share of client wallet. There's a lot of reasons that go into that. The third one is really cleaning up their books and their systems. Many people treat their business like it's their personal checking account. And so, you know, it's the. I'm self employed, so I have to save taxes as opposed to Showing a profit. And they don't really have necessarily systems in place to do that. And the fourth is really maintenance agreements or some type of repetitive revenue. Buyers love that. Buyers love consistency of income and being able to turn on a switch. Right. And call existing clients or their marketing or whatever their system is that they're building. Having that ready to go.

Awesome. That's a great list. The biggest one for most people is number two, the service and repair side of things. I think a lot of people have that if they've shifted from, you know, the new builds and stuff. A lot of companies like electrical contractors, they're still behind the eight ball on service contracts for a lot of them. So let's say it's a 40 year old business. They have a, you know, repeat customers that, oh, they all call us but they don't have service agreements in place. What do you recommend for them and how do they show that when they're looking to get evaluation or something like that? Like how do they make that good?

Yeah, absolutely. So I meet with a lot of people and I'll say, do you have maintenance agreements? Well, yeah. Okay, how many do you have? Well, they don't really prepay it. They just call me when it's time for maintenance. That's not what a buyer is looking for. Right. A buyer wants a client who is prepaying for their own loyalty. Right. If you have a heating and air guy or girl and you pay him 200 bucks a year for two visits, if it breaks, you're calling the person you pay 200 bucks to. So, so they're paying for that loyalty. And so we recommend doing it. You know, most of the reality is in most of these businesses, and use your prime example, 30 year old business, been taking care of people forever, have done an incredible job. Most of those owners don't believe in prepaid maintenance agreements.

Right.

You think I'm losing money, right? It's, I'm too busy, I don't have time to go do it. I mean it's going to take, take up my demand time. And the reality is customers want it. Oftentimes they hear about it from other places and they just don't even offer it. So it's not even option for them. So we say ask them about it, you know what we like to see. And I'll use heating and air for this example is per million dollars in sales, 500 maintenance agreements. It's a hard number to shoot for, but it certainly it helps them long term. It helps with staff retention, it helps with training Newer staff members. It helps with building customer loyalty, it helps for additional sales opportunity. There's all sorts of opportunities that are in there. I don't need to preach to you about the benefits agreement, but. And so many sellers that are set in their ways or owners that are set in their ways don't believe that.

Yeah. And so if they, if you do in a million dollars and you get 500 service agreements, which I think is, is pretty good, the people that are coming in and buying, that's one of the qualifiers that they would be asking is like, how many maintenance agreements that you have? Because that's how they're trying to benchmark the revenue that they don't pull you out and then it's all gone.

If you look at most of my ads for all of our listings, one of the first or second sentence in every ad is going to be how many maintenance agreements? Because it's going to get asked at the end of the day. Every buyer is going to say, how many are there? Now do I sell a lot of companies who don't have maintenance variants? Yeah, absolutely I do. And there's a lot of people who, who are done. When they call me, they're not looking. They're not, they're not saying, what do I need to do to build it for the next two years to sell it? They're saying, hey, I'm done business. And so we go to market at that standpoint right. Before things get worse or they lose any more interest that could potentially hurt it. So, so in that scenario, we don't, we don't do anything. But, you know, doing what we can to, to add to those maintenance agreements is definitely beneficial.

Yeah. Okay, let's say that you, someone reached out to you. I'm done. I need to get out of this thing. A lot of times they're burnout and they're probably because it's a job to them and it's not like a true owned business. So you meet with them and how do you coach them or work with them to like get out of the van or not even just the van, but like, how do you teach them to like, not be, not to be the job? How do you. What do they do?

So here's the reality. Maintenance agreements is one of the ways to do it. So many people don't hire somebody because they're worried about the shoulder season. Right. I hire this person. What am I going to do when things slow down? Well, maintenance agreements is an excellent opportunity to keep somebody busy and to keep cash flow coming in. So, so that's. That's why I preach about in with the. Getting yourself out of the van is. So that's how you can replace yourself. Right. By getting enough work that's consistent. So when it does slow down that you've got something for those people to do.

Yeah, Makes complete sense. Do you say, like, you know, within six months to a year, you should be all ready to go, you know, to sell your company or do you have a timeframe or anything? Or.

It's just. So the reality is it's different for everybody. My first company, when I was ready to sell, I'd have paid somebody to take it. Right. I mean, I was done. Yeah. I think many people get to me like that. And what happens, I see some people wait too late. You know, it's the quarterback who should have retired two years ago and didn't. Yeah, numbers are down. It's the same thing with the business. I. I have a lot of people call me and say, hey, I'm doing. I'll say, tell me about your business. Oh, we're doing $3 million in sales, $2 million in sales, and blah, blah, blah. They send me their tax return. It looks like a completely different business. It's like it's a million dollars in sales. Well, we used to, but I can't find any help and blah. And now it's down to them. They're 70 years old and they're doing all the service calls they can do, and. Because they should have sold it three years prior. So. So getting out before you need to get out is super important. Because when that desire is lost, obviously, you know, Phil, running a business is tough. Right. At the end of the day, and it's not getting easier as you're aging. And so for many people, they keep thinking, well, if I just wait another year, I can hire somebody and train somebody, and business is going to pick up, and then it keeps going down. And a buyer's not going to pay for you for what you did three years ago. They're paying you for what you're doing now.

Yeah, that's right. We had a company, they were doing like 5 or 6 million, and he was doing a million, you know, bottom line. And he had just hit that after like 20, 25 years. And he was kind of at like, the peak, you know, but he was so stressed of, like, all this stress on top of him, and he was going back and forth, you know, should I sell? Should I not sell? And this was in the 2022, 2023, whatever. And he he ultimately sold for like six or seven times and he got out. And he's like, it's the best decision I ever made. And he was at, he was kind of like riding that high, going up. But to your point, if he would have kept, kept it going and then it, it can snow, it can nosedive pretty quickly, which unfortunately then, then you're behind the eight ball.

Try to catch up. Yeah, right.

Yeah, exactly.

And now the numbers are down and, and so it creates its own problems. And there was a lot of people. Covid was good for a lot of home service companies, businesses at home. They realized their air conditioner didn't blow as cold as they thought it did, or light switch was bad or you know, these other things are, you know, their toilet needed to be replaced. And so they were there and it became an issue where they weren't gone eight hours a day. And so, so it was good for a lot of people and it was their peak and for many of them it would have been a great time to get out.

Yeah. So someone calls you, you know, 1 to 10 million and they're like, hey, so Patrick, what's my business worth? How do you, how do you figure that out?

Couple, couple ways. One, so, and this is going to be self promotion, so I apologize in advance. But like on my website, on the front page, it's click here to find out what your business is worth. So, so somebody can enter in some details. Gross sales, how much is repeat revenue, maintenance agreements, there's, there's questions on there about it and we'll give them a report that we physically do. It's not just some computer generated. It's. This is what we take our time and read through it and go through it. It's going to sell somewhere between this and this range. Now if they, they say hey, that, that may be close enough or I want to know what it is, then we'll do an actual full on valuation. We have a questionnaire that we send out that ask them, you know, commercial versus residential, what new construction exposure you have, what does your staff do, what do you do on a daily day basis, all that kind of stuff. And we get their financials so we'll dial it in. Yeah, both of them are complementary. The reality is, and I said it earlier, you know, for most of these people, most sellers specifically in the trades, their, their businesses are baby right at the end of the day and many of them have no clue what it's worth.

I know.

And they don't know who to ask.

I know.

And I Meet people at trade shows and events that took horrible deals because someone said, this is what it was worth and that's what they took. And I'm thinking, what? Why in the world did you take that? Because the reality is they didn't know who to go to. When I sold my first few businesses, I didn't have a clue. I said, this sounded like a good deal to me. It was a good deal for the buyer. We did it. And so I made all the mistakes that people make. And so. But I also sit at too many kitchen tables with 70 year old couples and say, hey, your baby's ugly. Nobody wants to buy it, you've done it wrong. And you do that once or twice, not a big deal. You do it a couple hundred times, it'll rip your heart out.

Yeah.

Because if you're 40 and I say, hey, you're doing it wrong, your baby's ugly, well, you fix it. Yeah, but when you're 70 and I'm saying that, you're done. And many of these people spent their whole life thinking this, this was their retirement plan. If you look at Most business owners, 80 of their wealth is tied up in their business. And so they think because they went to a trade show or seminar and somebody got up on stage and said, I sold it for a 20 time multiple or something like that, now they think theirs is worth that. And so, so I spend a tremendous amount of my time doing shows like this, speaking at industry events, writing articles. So. And to say I'll do evaluation for anyone at any time for no charge, because I don't, I don't want 10 years from now to be having that same conversation. Because up until then you could say, hey, I didn't know, I didn't know who to ask. I didn't know where to go. And I'm trying to do it now to say here, you know where to go, even if you don't do business with me, find out what it's worth. I have a lot of people that say, hey, I've got somebody making me an offer. Can you take a look and tell me if it's a good deal? Yeah, it is. Or no, it's not. Here's the numbers. So, yeah, so we do that. But there's a lot of other people in the industry to do it as well. Right. So I'm not the only guy that sells trades companies. There's a lot of people that'll do it and most of them are good people and are willing to give back as well. But, but to sit down over and over and over and over again. Say you've done it wrong, you've wasted 30 or 40 years. It's horrible.

Yeah. I think there's like two parts to it, from what I know, which is, you know, you could look at very simple ways, like take your profit and then multiply that by like maybe three or four times, and that will give you some semblance of it. But on the flip side is how ingrained are you in the business? So that when we pull you out, it's not like the business is gone, which there's a lot of different levers here that you need to pull. That's just a very simplified version of, like, what something might be worth, I'm sure.

Absolutely. And that's what the questions dictate.

Yeah.

How many maintenance agreements do you have in place? So then we'll have have a good understanding of how much of it's repeat revenue. How much. What's your marketing spend? Right. If you're spending 20 or 30% of your budget on marketing, chances are you're not doing a great job with customer retention. Or it's a business that's growing by leaps and bounds. So depending on those two things. So. So we ask very specific questions. What do you do on a daily basis? Are you out in the field turning wrenches? Are you managing? Do you have a GM in place? Do you have a install manager, a service manager? What do you have? So we ask all those questions because what. What happens is it's a multiple, right. Based on net income, and it's going to be a range. And so depending on the size of the business, it could be two times, it could be 10 times. Yeah. So in between that range, depending on all those other questions will depend. Is it going to be closer to 2 or closer to 10 or closer to 4 or closer to 5 based on the income as well as those other parts.

That's right. And I think it also fluctuates, like with private equity, they're willing to pay a lot more, where right now it might be a little bit more tight and less multiples because it's not as easy to get money. So there's a lot of fluctuation in those valuations. So if you do HEAR I got 20 times, well, that was, you know, way back when, and now it's a little bit different. And so things change all the time.

Well, here's the reality, too. Nobody brags about the bad deal they got. Right. Nobody gets up on stage and says, I sold my business and I Shouldn't have. And I held a note. It's all tied to earn out and they got all my cash. They don't stand up there and say that. Right. They say that 20 times. Well, it may have said 20 times on paper. What's important to me is what did the check say? At the end of the day, what did the check say? And that's what we focus on. So we try to be real about that. Because one of the first questions I have, somebody calls me and we're talking about valuation. I'll say, what does the check need to say for you to walk away? Well, we're doing 2 million in sales, and I won't take less than $5 million. And. And I'll say, I'm not your guy. I. I just get you those kind of numbers because that's not real. Well, I heard somebody at the trade show say that. Well, that's right. Lied to you. If you didn't see the check, don't believe it.

Yeah, that's right. So. So let's talk a little bit about this. The earn out the second bite of the apple. This whole thing that it might be structured that your business is worth X, but it's really, you don't get that check because there's a lot of these other things. What are some of those things that maybe people need to know about or they fall into these other traps.

Yeah. So part of it is I hear a lot of people saying you have to roll equity or you have to leave some money invested.

Yeah, yeah.

That's a lie. Right. Every deal is different and every buyer is looking for something different. So potentially, does considering investing in the new company or leaving some money invested open you up to more buyers? Absolutely, it does. The more willing. You're willing to be creative, the more people come to the table. But so rolling equity, what that is, is if they give you a million dollars for your company and you roll 20% equity, you only get 800,000. 200,000 stays with them. And they call that the second bite of the apple. And that's. There's lots of different ways that they try to brag how good it is for you, one of which is it's going to save you tax money because you're not going to get that money. The second part is they're going to sell your company. They're going to buy a bunch of them.

Yeah.

Sell your company down the road, and now it's going to be a bigger piece of the pie, which is true. But just like flipping houses or anything. There's got to be somebody new to sell it to.

Yeah.

So. And they've got to be profitable and they've got to do a good job. Many of these financial buyers are incredible at raising capital, but don't know anything about running an electric company.

That's right.

And so my word of caution is if you're going to give a complete stranger 20% of your retirement income with the belief that they're going to do a better job than you did running the company, you better hope they do.

Yeah.

Because they, they don't say it in the meetings. And I've been through thousands of the meetings. They never say this could be.