How to sell your home service business for the most money

As a home service business owner, your company likely represents the majority of your personal wealth. Yet many owners spend decades building their business without a clear exit strategy. When is the right time to sell? How do you maximize your company’s value? And what pitfalls should you avoid during the sales process?

In this article, we dive into these critical questions with Patrick Lang, owner of Business Modification Group and a seasoned business broker who has successfully closed over 136 transactions in the home service industry.

Four Keys to Maximizing Your Business Value

Four primary factors determine a home service business‘s value:

1. Get Yourself Out of the Business

Most companies that are stuck at a million dollars or less in sales are there because the owner won’t get out of their own way. They’re the best technician, the best salesman, the best bookkeeper. This creates a fundamental problem.

2. Build a Service and Repair Business Model

Businesses built on service and repair, as opposed to new construction or project-based work, command higher valuations. Service and repair provides more consistent revenue, deeper client relationships, and greater stability.

3. Clean Up Your Books and Systems

Many people treat their business like it’s their personal checking account.Buyers want clarity and transparency. They need to see that your business is truly profitable and has systems in place that don’t rely entirely on the owner.

4. Develop Maintenance Agreements

Recurring revenue is extremely attractive to buyers. Lang recommends aiming for 500 maintenance agreements per million dollars in sales. Buyers love consistency of income. Maintenance agreements help with staff retention, training newer staff members, building customer loyalty, and creating additional sales opportunities.

Common Valuation Misconceptions

One of the most common issues is owners who have unrealistic expectations about what their business is worth. 80% of most business owners’ wealth is tied up in their business. They think because they went to a trade show and somebody got up on stage and said, ‘I sold for a 20x multiple,’ now theirs is worth that too. The reality is much more nuanced. While businesses can sell for anywhere between 2x and 10x net income, the specific multiple depends on:

• Business size
• Owner involvement
• Maintenance agreement base
• Marketing spend and customer retention
• Management structure
• Growth trajectory

The Biggest Mistake: Waiting Too Long to Sell

A common theme is owners waiting until they’re burned out or the business is declining before deciding to sell. The lesson? Getting out before you need to get out is super important. A buyer’s not going to pay you for what you did three years ago; they’re paying you for what you’re doing now.

Beware of Earnouts and “Second Bites of the Apple”

Lang cautions against certain deal structures that can put sellers at risk:

Rolling Equity

Some buyers will suggest that sellers “roll” 20% of their equity into the new company structure. They’ll call this the “second bite of the apple,” claiming it will save on taxes and give the seller a bigger payday when the company eventually sells again at a higher valuation.

According to Lang if you’re going to give a complete stranger 20% of your retirement income with the belief that they’re going to do a better job than you did running the company, you better hope they do. Lang warns. “Once again, if you’re 40 years old and selling the business, 20% eh, not a big deal. But if you’re 60 years old selling it, 20% could be a big deal.

Earnouts

With earnouts, sellers receive only part of their money at closing, with the remainder tied to the business’s future performance.

An earnout reduces the risk to the buyer,” Lang explains. “But if they’re not ethical, and you no longer run the company, so you don’t have 100% control on how well it’s going to do, potentially it could be a bad scenario for you.

His advice? “My belief in a deal is: if you look at worst-case scenario and you’re comfortable with it, then it’s probably not a bad deal. But if you look at worst-case scenario and think, ‘If that happens, I’m in bad shape,’ then it’s probably not the deal for you.”

Family Transitions Require Special Care

When selling to family members or employees, Lang recommends bringing in a third party to establish a fair valuation and structure the deal properly.

He also recommends using SBA financing rather than seller financing in family transactions. “Christmas dinner is a little different when your kids aren’t paying you, and retirement is getting jeopardized because they’re not paying you.”

Growth Plateaus in Home Service Businesses

Lang identifies common revenue plateaus where businesses tend to stall:

• $1-1.2 million: Owners need to get out of the truck and hire technicians to replace themselves
• $3 million: The sales component becomes critical; owners need to build sales systems and teams
• $5 million: Management depth becomes essential; more structure is needed

At each of these steps, to get over those humps, you typically go backwards financially,” Lang notes. “You’re doing it all yourself, you’re super profitable, you don’t have a life, but you’re making a bunch of money. Well, now you’ve got to take some of that money and pay another technician you drop down. Then when they build back up, you grow through that.”

When Should You Start Planning Your Exit?

When asked when business owners should start planning their exit strategy, Lang’s answer is simple. “The day they open the business.”

I think there are two reasons to own a business: one is to make a profit, and two is to sell it at some point,” he explains. “If you build a business that is increasing in value to sell to somebody, it’s going to be an easier business to run. It’s going to be more profitable for you. And the chances are, you never want to sell it but if it ever happens and you need to sell, it’s already positioned and ready to go.

Final Thoughts

Whether you plan to sell your home service business next year or a decade from now, running it with an eye toward maximizing its value will make it both more profitable day-to-day and more attractive when it’s time to exit.

As Lang puts it: “Running a business to save taxes, which many people do, and running a business to sell are two different businesses. I can tell you if you build a business that is increasing in value to sell to somebody, it’s going to be an easier business to run.”