Over the past several years, residential services businesses have performed well. This success has prompted owners to consider expansion opportunities and has made the sector an investment focus for both strategic and financial buyers. Many of the services these companies provide are viewed as nondiscretionary, which makes them especially attractive during times of economic uncertainty.
The growing interest in these companies has led to more competition for assets and sometimes a mismatch between seller and buyer estimates of what a company is worth. Furthermore, the past decade has seen the emergence of aggregator platforms that consolidate mom-and-pop services businesses, ramping up competition for assets.
Bottom line: Investors need to be sharper about the companies they are buying, while sellers need to justify why they are particularly well-positioned.
Identifying your expansion model
We have found that there are five primary considerations that acquirers must address for their own business and when identifying potential targets:
Customer acquisition model. Does the business have a differentiated and defensible approach to acquiring customers that keeps its acquisition costs lower than those of its competitors?
Delivery model. How well is the business actually delivering? How do consumers perceive its service in comparison to that of other aggregators, scaled local players, and mom-and-pops? To what extent does that vary by geography?
Pricing model. Has the business isolated pricing levers, and can it determine where to set its pricing by service in order to maximize revenue?
Operating model. Does the business have a clear plan (organizational, operating and post-M&A aggregation) for how it will add value to the aggregated service company without losing synergies in serving customers or engaging employees?
Geographic model. How well-positioned is a target to serve its current geographic markets? What white space remains? Where could it expand next?
Many successful residential and commercial services businesses are fundamentally geography-based businesses serving local catchments; therefore, this edition of L.E.K. Consulting's Executive Insights focuses on the geographic model.
Getting smarter about geographic growth
Residential and commercial services businesses are local by definition. Each company, or each branch of a larger company, services a specific geographic area. Whether it’s an HVAC enterprise, a landscaper, a plumbing business or a roofing company, a service professional needs to drive to the customer’s location to deliver the service. The longer the drive, the fewer the customers that can be serviced in a day. Therefore, every business needs to define the specific catchment area it is willing to service.
A host of other factors will affect the attractiveness of a particular area or target company. Housing density, traffic patterns, demographics, weather intensity and competitive density all come into play. In fact, we have looked at more than 60 variables by local market to understand what local factors drive success for a local business.
Whether you are a company considering expansion options or an aggregator looking at specific target companies, geography should be a central component of your decision-making process, and it is critical to ask the right questions (see sidebar).