Buying a Service Business
If you spend any time looking at business for sale listings, you'll notice that a great number of businesses available fall into the category known as "service". This is a huge sector ranging from translation services or cleaning companies to direct to consumer entities such as home health care. In the U.S. there has been a lot of publicity about how the economy has moved away from a manufacturing base to a service-type economy. While that may not be good news for the areas that were built on and provided manufacturing jobs, it does provide business buyers with a wide range of options.
The good news about this sector is that it offers the greatest choice of potential businesses for you to acquire, and the skill set needed to be successful is more generic in scope than a manufacturing business, where prior experience is a must.
What to Consider When Buying a Service Business
Here's what you need to be aware of when buying an existing service business:
- It may be more difficult to obtain non-seller financing in this segment because there will typically be less "hard assets" such as machinery and equipment that some buyers and third party lenders want in place.
- You should be the type of person that is comfortable with offering an intangible type product or service for sale.
- Customer concentration can be a factor. Many service businesses were started by entrepreneurs who simply turned their prior job into a business and may have built the business with a limited customer base, especially if the service is sold to businesses and not consumers. You will want to be sure of and have some protection in the deal terms that will ensure these relationships will continue after you buy. The seller of the business may be "the business". If the current owner has built long-term relationships with the clients and they (the customers) see him as the face of the business, will the business transition successfully to you?
- What are you really buying? Is there some element of exclusivity to with the product or in the region?
- Are you more comfortable dealing directly with consumers or businesses? Make sure that the business fits your strengths and preferences.
- How easily can a competitor enter into the business? What are the barriers to entry if anything?
- Is there an "800 Pound Gorilla" in the business – meaning a huge competitor who can ultimately impact your business?
- Is the business limited to where it can operate or is expansion a viable option to grow?
- How easily can any employees quit and become your competitor?
- What can you do to build the business? Can you add additional products/services and sell them to the existing customer base?
- During the due diligence phase be certain to investigate the suppliers, customers, and contracts in addition to the financials.
- Include a rock solid non-compete clause in any contract.
- Allow yourself enough of a transition/training period with the seller.
- After you take over don't make any drastic changes; you must learn the peculiarities of the business first.
Service businesses usually enjoy higher than average profit margins compared to other businesses and can provide you with an excellent platform to grow. The working capital required when starting out is typically not prohibitive, so as long as you prepare adequately, you will be able to locate and negotiate the right price on a service business that makes sense for you.
Service Business Prices and Valuation Data
As you look into service businesses, you will get a sense of price to earnings ratios. Here is an overview of some popular categories of service business, and their relative pricing multiples over the last five years.
|
Business |
Revenue Multiple |
Earnings Multiple |
Median Sale Price |
|
0.65 |
2.05 |
$224,750 |
|
|
1.15 |
3.06 |
$225,000 |
|
|
0.79 |
2.34 |
$200,000 |
|
|
0.64 |
2.09 |
$261,750 |
|
|
1.20 |
3.23 |
$200,000 |
|
|
1.15 |
3.46 |
$652,000 |
|
|
1.00 |
2.33 |
$255,000 |
|
|
0.87 |
2.56 |
$352,500 |
|
|
0.72 |
2.68 |
$589,000 |
|
|
0.55 |
2.69 |
$522,500 |
For more market insights, see BizBuySell’s Quarterly Insight Report, and Industry Pricing Multiple Tables.
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