The residential services and contracting industry includes contracting businesses which provide renovation, landscaping and design-build services for the residential market in Canada. It also includes construction and building material suppliers like flooring and ceiling materials, indoor lighting, paint, tiles and ceramics, furniture and other home décor.
Key suppliers for this industry include tools and hardware retailers, lumber producers, fabricated metal and steel manufacturers, concrete and cement producers and industrial machinery manufacturers. The industry is in its mature stage and faces moderate regulation. The residential housing market experienced strong growth in the recent decade due to urbanization and immigration of foreign nationals.
The residential services and contracting industry is heavily influenced by residential renovation and construction expenditure. As a result, key drivers for this industry include the value of residential and non-residential construction, residential renovation expenditure, the interest rate, and per capita disposable income.
The Value of Non-residential and Residential Construction –Increases in the value of residential and non-residential construction indicate new investment into residential improvement and landscaping projects. As industry operators rely heavily on consistent inflow of new projects, changes in these values have positive correlations with demand for industry services.
Per Capita Disposable Income – Per capita disposable income represents the surplus income available to consumers after essential expenses. As renovation and landscaping services are non-essential, increases to disposable income will result in increased spending on landscaping and residential services company offerings. Changes to personal disposable income are positively correlated with increases in demand for this industry.
Residential Renovation Expenditure –Residential renovation expenditure is the total amount of spending on residential improvements, including housing starts, home renovations, and land and property improvements. Increases in residential renovation expenditure as a result lead to increases in demand for industry services.
Interest Rates – Lower interest rates decrease the cost of financing, incentivizing homeowners and developers to borrow capital to fund new residential improvement and landscaping projects. Thus, lower and stable interest rates produce long-term demand and growth for industry services.
Recent Service and Contracting Transactions
Selling a Services and Contracting Company
The service & contracting industry is cyclical in nature and is impacted by various macroeconomic factors which drive demand from end customers. Running a successful contracting company involves operational risk and the technical nature of the role emphasizes the need to find the right buyer who can successfully manage operations and ensure long-term growth. As Canada’s leading private market M&A Advisory firm, Beacon Mergers and Acquisitions understands that selling a business is an important decision. A dedicated business owner not only seeks to extract maximum value from the sale of a business but also seeks to sell the business to a competent buyer who can continue the company’s legacy. Beacon has worked on over 100 valuation and M&A advisory mandates in this space, bringing extensive experience in deal negotiation to the table. Our experienced advisory team will assist your business in navigating the entire sell-side M&A process.
As an entrepreneur or business owner who is exploring a potential sale, it is important to understand some key factors specific to the construction and engineering industry that might impact the likelihood of a potential sale. These are factors that determine business attractiveness for potential buyers and investors.
Skilled Labor – Many sub-sectors within the service & contracting industry often face challenges due to labor shortage. Therefore, retaining high quality skilled labor and ensuring that teams are managed well is important. In some industries, being associated with a credible and reputed labor unions can prove beneficial in securing long-term contracts and reducing fixed labor costs, while offering the flexibility of scaling up and down based on project requirements. Given the shortage of labor, companies with catalogued processes in place are well positioned in the event of employee turnover. Companies that have implemented automation and processes to reduce dependence on employee specific knowledge garner stronger interest from prospective buyers compared to those that do not.
Revenue Volatility – Businesses in the service & contracting and engineering industry often experience high revenue volatility on an annual basis due to the contractual nature of operations. Large one-time projects from a single client can lead to strong growth in sales and profitability in any particular year, however, buyers like to see consistency. High revenue volatility and high revenue concentration are both red flags for buyers. One strong year might not warrant a higher multiple and to extract value from this growth spurt, a seller must be able to prove without doubt that this trend is likely to continue. Often buyers will ask for historical invoices, existing pipeline reports and other documentation to confirm the company’s growth trajectory. Organizing these reports before a sale will reduce the burden on due diligence in late-stage negotiations.
Long-term Service Agreements – Companies that generate recurring revenue through secure service agreements are perceived as less risky on a general basis. Long-term service agreements increase certainty of business success through ownership transition and instill confidence among potential buyers. Such agreements also help in overhead planning and make it easier for companies to obtain acquisition financing. Hence it is recommended that whenever possible, companies sign long-term agreements with customers and suppliers.
Track Record – Companies with a poor record and a history of accidents often face challenges during a sale. A poor track record impacts the company’s ability to secure new contracts and generate revenue, which can have a major impact on profitability. In addition, it leads to higher insurance costs and difficulties in retaining skilled labor. The impacts of these on the valuation are two-fold. Firstly, a lower baseline profit leads to a lower valuation. Secondly, a lower baseline EBITDA also leads to multiple compression which can further reduce the value of a company. During due diligence, buyers often call customers before putting in a final offer. Poor reviews from customers could cause a deal to fall through.
With 40 years of combined experience serving businesses within Toronto, Ontario, and abroad, the Beacon transaction team has extensive knowledge and experience successfully working for several service and contracting companies from a variety of sectors. Whether it be a valuation or sale, our team can provide expertise and resources found only at larger corporations, paired with the personalized touch of our M&A Advisory team. Contact us today to get in touch with one of our advisors.