Geospatial Intelligence: The Key to Growth for Residential Services

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: 

1. 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? 

2. 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? 

3. Pricing model. Has the business isolated pricing levers, and can it determine where to set its pricing by service in order to maximize revenue? 

4. 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? 

5. 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). 

Using geospatial analysis to inform decision making 

The number of elements that can affect the success of a purchase or expansion decision can be overwhelming; fortunately, tools exist to help buyers, aggregators and owners chart effective, data-informed growth plans. The following are just a few ways we can apply geospatial analysis. 

Assessing positioning in existing markets 

Consider a buyer that is weighing the attractiveness of two potential targets. We begin by mapping drive times to create a catchment area — in the example here, the catchment is defined as the area within a 20-minute drive of each target. We then analyze spend at the ZIP code level to assess a branch’s ability to capture share in its MSA. Finally, we overlay competitive density onto these maps at the ZIP code level to assess where competition is higher versus lower (see Figure 1).  

In this example, Target A’s location is better placed to capture spend, given that it can serve 67% of the accessible market versus Target B’s 39%. That translates into a difference of $50 million in accessible earnings before interest, taxes, depreciation and amortization (EBITDA) between A and B. 

Finding new sources of growth within existing markets 

Geospatial analysis can also identify underserved areas for new branches or determine where to target acquisitions by pinpointing areas with relatively higher spend and lower competitive density. In the example shown in Figure 2, we create a ratio of spend to competitive density. Those areas with the highest spend and lowest competitive density are the best ones to target for acquisitions or opening new branches. 

Finding new markets 

Every business has a unique profile, which is why a company must identify those elements that are most critical to its business, including economic factors, construction activity, weather, demographics, etc. We can use these elements to derive an “index of success.” This index can be used to assess not only a company’s current portfolio but also its growth plans — specifically, the MSAs it is targeting for expansion. Figure 3 shows an example of this application. MSAs are grouped into deciles against which a company’s assets have been assessed. In this example, 40% of the target’s assets are in the top two deciles.

Location: A treasure trove of information

Residential and commercial services are likely to remain attractive businesses for the foreseeable future. But voracious aggregation or expansion may not yield the best results, particularly as competition for these companies increases. Clearly, some businesses are more attractive than others, and location is a key contributor; however, location is complex, and myriad factors determine which locations are the best fit for which companies. Companies that complement their traditional decision-making toolkits with geospatial analysis will be rewarded with expansion plans that yield optimal results.