As a field service business owner, you’ve likely noticed an uptick in chatter around private equity funds over the past few years. This isn’t a coincidence – the field service landscape, particularly pest control, lawn care, cleaning services and more – has become a hot target for private equity investment. But what does this mean for you and your service company? Together with Potomac, WorkWave hosted a panel featuring PE experts and field service providers to help you understand and navigate this conversation. Here’s what was discussed.
The Booming Private Equity Interest in Field Services
According to one of our panelists, in 2023, 85% of transactions in the residential and commercial services space involved private equity-backed firms, up from just 20% five years ago. This surge in interest isn’t random. Private equity funds are attracted to the field service industry for several reasons:
- Fragmented market: The field service industry is ripe for consolidation, offering opportunities for rapid growth through acquisitions.
- Recurring revenue models: Our subscription-based services provide stable, predictable cash flows – which is attractive to investors.
- Essential services: Pest control, lawn care and cleaning are recession-resistant services that households and businesses need regardless of economic conditions.
- Attractive business models: Field service companies often have scalable operations and margins, making them ideal for private equity investors.
Understanding the Private Equity Process
If you’re considering partnering with private equity funds, it’s crucial to understand their process and what they’re looking for. Here’s a general breakdown you might expect:
Initial Approach and Valuation
When a private equity firm reaches out, they’ve likely already done some homework on your business. They’ll typically request some basic financial information and service reports from your field service software. Based on this initial data, they’ll provide a rough valuation range for your business.
The Due Diligence Deep Dive
If you decide to move forward, prepare for an intense examination of your business. During due diligence, the private equity firm will scrutinize:
- Financials: Expect a thorough review of your books, including revenue recognition, profit margins and cash flow.
- Operations: They’ll want to understand your service delivery model, route efficiency and how you manage your mobile workforce in real time. This includes evaluating how efficiently you schedule service appointments and manage each field service technician.
- Compliance: Environmental regulations, employment practices and licensing will all be under the microscope.
- Assets: Every truck, piece of equipment and software license will need to be accounted for.
- Key Performance Indicators (KPIs): They’ll analyze metrics that demonstrate successful field service management and customer satisfaction, like customer retention rate, contract renewal rates, gross profit margin per service and more.
Deal Structures and Terms
Private equity deals are not one-to-one. You might be approached as a potential “platform” company – the foundation for future acquisitions in your industry. Or, if you’re a smaller operation, you could be an “add-on” to one of their existing portfolio companies. One common approach is the leveraged buyout, where the private equity firm uses a combination of equity and debt to acquire your company.
One key aspect to understand is the concept of “equity rollover.” This means retaining a portion of ownership in your company post-sale. It’s a way for the private equity firm to ensure your continued involvement and alignment with their growth goals.
Preparing Your Business for Private Equity Interest
Even if you’re not planning to sell anytime soon, it’s never too early to start preparing your service company for potential private equity interest. Here are some key areas to focus on:
- Financial Readiness: Ensure your financial records are clean, accurate and up-to-date. Your field service software should offer a level of analytics and reporting to provide the detailed needs private equity funds expect.
- Operational Efficiency: Streamline your field service operations and leverage technology to improve service delivery and customer satisfaction. Private equity investors love seeing businesses with scalable operations that effectively manage their field service teams and consistently meet or exceed customer satisfaction goals.
- Asset Management: Maintain detailed records of all your assets, from vehicles to equipment. This not only helps during due diligence but can also uncover hidden value in your business.
- Customer Metrics: Track and improve key performance indicators like customer acquisition cost, lifetime value and retention rates. These numbers can significantly impact your valuation and demonstrate successful field service management.
Choosing the Right Partner: Private Equity vs. Strategic Buyers
As you consider your options, you’ll likely encounter both private equity funds and strategic buyers (like larger competitors). Each has its pros and cons:
Private Equity Firms:
- Focus on growth and value addition through leveraged buyouts and other investment strategies
- Often allow more autonomy for existing management teams
- Bring financial expertise and resources for expansion
Strategic Buyers:
- May offer higher initial valuations due to synergies
- Typically integrate acquired businesses more fully
- Can provide industry-specific knowledge and resources
The key is finding a partner whose vision and values align with yours. Don’t be afraid to ask tough questions about their plans for your business, your field service workers and your mobile workforce.
Navigating the Sale Process
If you decide to explore a sale, consider engaging professional help. An experienced M&A advisor or investment banker can run a competitive process, potentially increasing your valuation and ensuring you get the best overall deal – not just the highest price.
Remember, valuation is just one piece of the puzzle. Pay close attention to other terms like working capital requirements, tax implications and equity rollover options. These can significantly impact the actual value you receive from the deal. Also, be prepared to discuss various capital structures, as private equity firms often use a mix of equity and debt in their leveraged buyout strategies.
Post-Deal Realities
If you do partner with a private equity firm, prepare for changes. You’ll likely need to adapt to new reporting structures and growth expectations under private equity ownership. However, you’ll also gain access to resources and expertise that can help take your field service teams to the next level over a defined period of time.
Many owners find the post-deal period exciting, as they can focus on growing the business without the day-to-day financial pressures of ownership. It’s an opportunity to leave a lasting legacy in your industry and potentially create value for the private equity firm’s limited partners and other institutionalized investors.
PE: Action steps for field service providers
The increasing interest from private equity funds in service companies presents both opportunities and challenges for business owners. By understanding the process, preparing your business and carefully considering your options, you can make informed decisions about your company’s future.
Whether you’re looking to sell in the near term or simply want to build a more valuable business, now is the time to start preparing. Focus on clean financials, operational efficiency and strong customer metrics. Remember, private equity ownership can be a long-term investment strategy for both the investment firms and the private companies they acquire. Unlike the volatility often seen in the public market, private equity can offer a more stable environment for growth.
And keep in mind, the best deals happen when both parties – service providers and limited partners alike – see value in coming together, with a shared commitment to maintaining high levels of customer satisfaction.
Related Reading
Learn more PE expert insights from one of your own! We interviewed Jordan Cano, Director of Mergers & Acquisition at Senske, to dig into a real-world perspective on what matters beyond valuation.
Are you interested in seeking external funding to fuel your future growth initiatives? Learn more about WorkWave Capital, a financial solution that provides customers with the cash they need quickly and easily – without requiring collateral. Learn more about securing flexible funding – on your terms.
Are you interested in learning more about your software solution’s financial health – and why it matters to you as a business owner? Read more about why the financial health of your software provider matters – and signs to watch out for.
