“Does Anyone Know a Good Plumber?” – Dynamics Driving M&A Activity in the Facility Services Sector
By Chuck Aquino, Managing Director
Few businesses are as vital to their customers as facility services specialists. Regardless of whether the customers are residential, commercial, industrial or institutional, they all depend on blue collar trades like plumbing, HVAC/R, electrical, roofing, security, landscaping, paving, etc. to keep their house in order and business running. Usually, these services are delivered on a recurring basis, and diagnostics are performed periodically to troubleshoot potential issues. And when issues do arise, these providers are first on the scene to perform any break-fix work, which is usually non-deferrable and often price inelastic. A disruption on any one of these fronts can impair business performance or result in very uncomfortable living conditions until the issues are ameliorated.
The vitality of these skilled services, coupled with the fragmented market through which they’re provided, presents a compelling investment opportunity for financial and strategic buyers alike. Facility services providers have recurring touchpoints with their customers, offering predictable and recurring revenue streams. Their businesses are typically asset-light, yielding strong cash conversion rates and profit margins. They tend to be localized with an operating radius limited to the reach of their crews and technicians. All of this is to say they are highly scalable, offering an immense roll-up opportunity to which buyers, particularly financial sponsors, are particularly drawn. And while this sector has been perhaps the most active from an M&A perspective over the past ten years, there remains tremendous upside.
What’s Fueling the Growth?
In an era of rising input costs and increased competition, businesses of all types are in constant search for cost-cutting opportunities and competitive advantages. A commonly tapped strategy is to outsource non-core functions, allowing management to reduce overhead while focusing resources on growing the top line. Businesses today are finding economic value in freeing their staff from the burdens of tasks such as grounds maintenance, janitorial services, building systems upgrades and MEP repairs, and allowing them instead to grow their sales force, expand their product and service offerings and improve customer service. Simply put, they’re enhancing their overall value proposition by focusing on core mission delivery and leaving the ancillary, but essential maintenance and upkeep needs of the business to the experts – the facility service providers.
In the post-COVID environment, stricter health, safety and environmental regulations are placing an unprecedented emphasis on the building envelope. Businesses and homeowners alike are turning to specialized experts to comply with heightened standards. HVAC/R systems with advanced air filtering and sanitation capabilities are replacing older units. Businesses are enacting wholesale conversions to LED lighting systems and implementing smart building systems to regulate temperature for increased energy efficiency. Safety protocols now call for next-generation fire suppression and life safety systems, 24/7 video surveillance and other security measures. Finally, parking lots, whose domain was once limited to repaving and snow removal services, are now also being outfitted with security staffing, smart meters and automated payment technologies.
Private Equity’s Big Play: The Race to Consolidate
Demand for the skilled trades has never been higher, yet at the same time, supply is at an all-time low. Baby Boomers, who occupy a large share of the skilled labor force, are retiring en masse, and recent generations have largely steered away from trade schools in favor of traditional college pursuits. From an investment perspective, this supply-demand imbalance clearly favors the facility services sector, particularly the participants who can solve the labor puzzle. For private equity, the race is on to harness this talent, and without the patience or available labor pool to grow it through traditional apprenticeships and other training programs, the answer lies in acquisitions. Private equity has always leaned on the buy-and-build strategy for value creation, and in a shrinking skilled labor market, the first movers on the acquisition front will almost certainly be the winners. Conversely, smaller, local providers are finding it more difficult to compete with national players who can afford to recruit away scarce talent. Smaller players are feeling the pressure to partner with larger platforms who have the resources to stay afloat with the ongoing consolidation wave.
Private equity also favors a predictable revenue stream, and one could credit this investor sphere with instilling a fundamental shift in the facility services model. Once defined by the mantra, “Call me if you have a problem,” facility services providers today are more focused on regular customer interaction through preventative maintenance programs versus one-time emergency visits. Customers understand the nominal charge for diagnostic inspections pales in comparison to the financial burden and costly downtime of unexpected equipment replacements. Providers appreciate the enhanced revenue visibility and labor utilization efficiency. And if an issue is identified, the break-fix work is typically awarded to the maintenance provider on the scene, with whom the customer has the incumbent relationship. The classic win-win!
In the early days of the private equity incursion into the facility services world, acquisition efforts were largely confined to singular trades. Roll-up strategies within fire & life safety were soon replicated within the HVAC/R market, and from there spread to other verticals like paving, MEP, landscaping, janitorial and pool maintenance. Recognizing the advantage and pricing power of offering more of a one-stop solution to a facility manager, acquisition strategies in the last several years have focused on cross-sector adjacencies. HVAC/R companies are expanding rapidly into the broader MEP space given the natural labor crossover. Roofing companies are adding capabilities like power washing, painting and window installation. Landscaping companies understand the seasonal hedge of expanding into snow removal. Electrical contractors are a complementary fit with fire & life safety and smart building systems integrators. This has allowed investors to find untapped expansion lanes, creating larger platforms with greater resources, higher margins, and more diversified, recurring revenue streams.
Tech is Changing the Game
Cleaning, repairing and updating commercial and residential structures is not solely a manual endeavor. Technology is reshaping the facility services industry in fundamental ways. Companies are using predictive maintenance tools, data-driven energy management systems and integrated security solutions to cut costs and improve efficiency. Data is being harnessed and used in ways never conceived. Leading facility services platforms are integrating technology into their customer service models, offering holistic, real-time status updates on all maintenance, repair and replacement projects. Customers benefit from a consolidated calendar of all future inspection work, real-time updates on the status of their equipment and having the runway to address any issues that are diagnosed before reaching emergency stage. Companies that leverage technology to streamline operations and improve service levels are garnering premium investor interest, which is often reflected in valuation.
What’s Next for M&A in Facility Services?
M&A activity among facility services providers is certainly alive and well. Buoyed by national regulatory and environmental priorities, a continued shift toward outsourcing, a highly fragmented landscape of local providers across myriad specialty verticals and a pronounced supply-demand imbalance of skilled labor, the opportunities to create investor value in this sector are unparalleled. The classical PE playbook reads as follows: acquire a platform utilizing mostly debt financing, consummate accretive acquisitions, realize administrative efficiencies, promote revenue enhancement, pay down debt with free cash flows and sell the “bigger, better, faster” platform at a higher multiple than at the time of acquisition. It’s no wonder why the skilled trades, long passed over by institutional investors in favor of “shinier objects”, has become one of the most sought-after realms of private equity involvement over the last ten years. And it’s not slowing down.
© Copyrighted by Chuck Aquino, Managing Director, EdgePoint Capital Advisors, merger & acquisition advisors. Chuck can be reached at 216-342-5737 or on the web at www.edgepoint.com.