Selling your service business is a multi-step process that requires a strategic and comprehensive approach. Follow our roadmap to help determine the value of your business, assemble a team of experts, develop effective exit strategies, strategically market your service business to find buyers, and help navigate negotiation to achieve the best possible outcome.
To prepare your service business for sale, the first step is to determine its true value. There are various methods for valuing a business, but most service business owners and buyers use pricing multiples to assess the market value range. Adopting this market-based approach enables you to establish a competitive and realistic asking price and eliminates any biases you may have developed after years of ownership.
Market-based valuations use pricing multiples to compare similar businesses, making them an effective way to determine a company’s value compared to others in the industry. By relying on these multiples, prospective buyers can make informed decisions with a clear understanding of a business’s worth.
The primary metrics used to calculate these multiples are earnings (cash flow) and revenue (gross sales). For small service businesses with earnings under $1 million, seller's discretionary earnings (SDE) is the most appropriate cash flow metric to use.
|
Service Businesses Sold (2017-2024) |
Average Earnings Multiple |
Average Revenue Multiple |
|
All Service Businesses |
2.59 |
0.83 |
|
Architecture and Engineering Firms |
2.57 |
0.74 |
|
Catering Companies |
1.85 |
0.50 |
|
Cleaning Businesses |
2.18 |
0.71 |
|
Commercial Laundry Businesses |
2.04 |
0.73 |
|
Dry Cleaners |
2.00 |
0.77 |
|
Funeral Homes |
3.47 |
1.34 |
|
Landscaping and Yard Service Businesses |
2.52 |
0.73 |
|
Laundromats and Coin Laundry Businesses |
3.50 |
1.31 |
|
Legal Services and Law Firms |
1.97 |
0.62 |
|
Locksmith Businesses |
4.24 |
1.00 |
|
Medical Billing Businesses |
2.97 |
1.53 |
|
Pest Control Businesses |
2.56 |
0.97 |
|
Property Management Businesses |
2.75 |
0.88 |
|
Security Businesses |
3.23 |
1.22 |
|
Staffing Agencies |
2.93 |
0.64 |
|
Waste Management and Recycling Businesses |
2.32 |
0.42 |
|
Other Service Businesses |
2.50 |
0.75 |
Although service business valuations typically fall within a certain range, the value of each business is unique and depends on several factors, including the local market, specific financials, and operations of the business. For potential sellers developing an exit strategy, it is helpful to consider general market averages to establish a starting price range.
For service businesses, the average earnings multiple is 2.59, and 76% of service businesses fall within a range of 2–3.5. The wide range highlights how local market trends and unique business operations can affect the valuation and sales price.
When it comes to making decisions on buying a service business, buyers typically consider the bottom-line return on investment. Therefore, cash flow multiples are often the most relevant metric to use. However, it can also be helpful to look at top-line revenue multiples to gain insight into the profit margins of sold businesses to see how your company measures up.
Service business revenue multiples typically range from about 0.4 to 1.5, with the average at 0.83 and median revenue reported in our service business data set at $510k.
To determine an asking price for your service business, you need to gather financial documents for the past three years. These should include income/profit & loss statements, as well as a balance sheet showing the value of your tangible assets minus the liabilities of your business. You will also need corresponding tax returns to validate your financial statements. Enlist an accountant to help you put together an SDE that shows how much your business makes after adding back non-recurring and discretionary expenses. This financial information is critical for establishing a realistic and competitive asking price for your business.
As the owner of a service business, you have a unique insight into strengths and weaknesses of your business. However, to ensure you maximize the value of the business you have built, it’s important to enlist the right experts.
When valuing your service business, it’s essential to have accurate financial records going back three years. To ensure you have the necessary records and financial statements, it’s helpful to work with a trusted accountant who can help organize your records and provide guidance. During the due diligence phase, potential buyers will scrutinize your financials, so having a professional on your team to ensure their accuracy is essential.
Navigating the legal aspects of selling your service business can be complex, but enlisting an experienced business acquisitions attorney can help protect your interests throughout the process. From drafting non-disclosure agreements to negotiating and drafting the buy-sell agreement, your attorney will guide you through each step and ensure that your interests are protected.
Business brokers play a crucial role in the successful sale of your service business, acting as intermediaries throughout the process. They offer a range of services, from market valuation and pricing analysis to strategic guidance and advice for maximizing value. It’s important to choose a broker with specialized knowledge of your industry, as they can offer specific insights into market trends and potential buyers. Brokers typically work on commission, with fees ranging from 10-15% of the final sale price.
To ensure a successful exit, it’s important to develop an exit strategy regardless of whether you plan to sell to a trusted business partner, a family member, or on the open market. A well-executed exit plan takes time, ideally three years before listing the business for sale. This time frame allows you to prepare and establish the business’s value, optimize expenses, organize financial records, and assemble a management team. This approach helps to maximize the business’s earning potential and increases the value for prospective buyers.
The timeline for selling a service business is influenced by many factors - expect the process to last between six months and a year. For service business sales, the average days on the market in 2024 were 166 days. To help accelerate the sale, it’s important to set a realistic price and ensure your financial documents are clear and understandable to potential buyers.
In 2024, just over 1,100 service business sales were recorded on BizBuySell. Key factors to consider when assessing the duration of the sale include sale price, cash flow, rent /lease considerations, and location.
After determining the value of your business and creating an exit plan, the next step is to prepare your service business for sale. This involves gathering all relevant information and paperwork and identifying individuals who can take over the daily management of the business. If necessary, provide additional training to team members during this phase. One of the central tenets to exit planning is to get your business running without the daily intervention of its owner. Additionally, it’s important to create manuals that document all processes and procedures to ensure a smooth and successful transition.
When preparing to exit your service business, consider the factors that would make it appealing to potential buyers. Evaluate your business from the perspective of a potential buyer and identify areas that need improvement. By taking the time to analyze and optimize your business, you can increase its value and increase your chances of a successful sale.
|
Improves Price Multiple |
Reduces Price Multiple |
|
Reliable and well-documented operation: organized financials, detailed operating procedures, comprehensive vendor policies, etc. |
Obscure operation: Complicated or non-existent bookkeeping, unreliable vendor relationships, undocumented agreements, etc. |
|
Excellent location (if applicable), with foot traffic draws. |
Low traffic location, requiring marketing to draw customers. |
|
Established brand expertise or specialty niche. |
Customers who are committed to the owner, not the brand, are a liability. |
|
Market or lower rent and good lease terms. |
Above market rent and/or undesirable lease terms that need to be renegotiated. |
|
High customer retention rate. |
Low customer retention rate. |
|
Established and repeatable marketing and sales pipeline. |
Ad hoc marketing and sales. |
|
Experienced and tenured employees likely to stay after the sale. |
Employees that are not committed to staying once the business is sold. |
|
Operations management in place. Ideally owner focuses on high-level strategy, not daily operations. |
Owner manages daily operations – owners too connected to the day-to-day operations impact value. |
|
Seller financing: Retail owners willing to finance a portion of the sale can often receive higher prices. |
Cash only: Sellers who insist on all cash will usually have to accept a lower offer and may receive fewer offers to consider. |
To find the right buyers for your service business, you need a marketing platform that puts it in front of interested parties with the intent to purchase. Beforehand, service business owners must decide whether to keep the sale confidential, as it’s standard practice to maintain discretion to prevent disruptions to business operations and maintain value. However, exceptions apply, such as for well-known and respected businesses where publicity may be beneficial.
To maximize the chance of success, a combination of marketing approaches is recommended, including local ads, online business-for-sale marketplaces, and confidential inquiries. If you work with a business broker, they will take care of the marketing strategy – but be sure to stay in the loop on listings and inquiries.
And don’t underestimate the value of letting trusted business associates and even competitors know of your intention to exit. Those already involved in your industry may value your business more than unknown parties.
The final steps when selling a service business come down to negotiating the terms and closing the deal. It’s important to remember that keeping your emotions in check, whether you’re selling your business on your own or using a broker, is key. Seek objective input from your accountant or attorney if you choose the For Sale By Owner route. Otherwise, your business broker is the best person to rely on for advice regarding when to give a little and where to draw lines during negotiations.
Financing options, such as selling the business over time with interest or pre-qualifying for an SBA loan, can improve your negotiating power and result in a higher sales price.
Once final terms of the deal have been agreed upon, it’s time to close the deal. To simplify to process, schedule the closing at the end of the quarter, month, or pay period. Our checklist can guide you through the process of transferring the business to the new owner.
Selling your service business is a complex process, but you can simplify things by taking the time to understand the value of your business and how the business-for-sale market operates. Whether you list and market the business on your own, or hire a business broker, you’ll be on your way to a smooth transaction and close the sale quickly.
Download our free Guide to Selling your Small Business and get information and advice to sell your service business successfully and with confidence.
