News & Resources

Overview

Like many M&A markets, the Home Services category saw deal activity at an all-time high in 2021, with both private equity buyers and private equity-backed strategic buyers driving consolidation. Low interest rates, increased levels of discretionary income, and increased time spent at home were the primary drivers in Home Services acquisitions. While the COVID impact was detrimental to the commercial property market, it has been a significant tailwind for residential service businesses. Homeowners are viewing their number one investment (their home) in a whole new way, and providers servicing those homes are in high demand post-pandemic. Even as deal volume in 2022 and Q1 2023 has dropped from the high of Q4 2021, industry consolidations ensure that the pace remains elevated.

Key Insights

• While historically anchored by plumbing and HVAC transactions, the home services market continues to see robust deal activity with the addition of home restoration, pest control, roofing and landscape services consolidations.
• The US continues to see a housing shortage (which keeps home prices high despite rising interest rates) and the existing aging housing stock has caused, and should continue to cause, high demand for home restoration services.
• The 2022 median deal size in the lower middle market for home service companies was $43 million, down from $54 million in 2021.
• While demand is still strong, overall deal flow is beginning to normalize. We expect to see raising interest rates further impact valuations and therefore deal volumes.

Home Services Full Report

Consolidation in Home Services
Consolidation is a multi-year process that occurs in highly fragmented industries and ultimately creates a few large players with dominant market positions that span geographies. This consolidation is accomplished primarily through the acquisition of smaller, established businesses, which creates an extremely competitive M&A market in the process. In our position as sell-side M&A advisors, we see a direct correlation between an industry’s position in the consolidation lifecycle and the valuation multiples that are paid to sellers in that industry.  

Within the broader home services category, there are multiple industries at various stages of consolidation. Restoration is in the early innings, while plumbing and HVAC are farther along but still highly active. Consolidation in these industries is driven by macroeconomic factors including the aging US housing stock, population growth, new construction, and the shifting role of the home as an office and workspace following the pandemic. As hybrid routines are embraced, Americans are spending more time in the home than ever before.  

Private Equity’s Role
The most active consolidators in these industries are backed by private equity. The typical private equity playbook seeks out large, fragmented and growing markets where companies have recurring revenue and high gross margins; home services companies can offer all these attributes and more. If you have recently had your furnace worked on, called a plumber, or had an unfortunate flood or fire damage emergency, you know that hourly rates for these services continue to rise. When something goes wrong in the home, consumers can’t afford to be price sensitive.  

In the home services transactions we have observed, sellers have consistently received a good number of offers with attractive purchase prices and seller-friendly structures. While the market is still hot, you can see from the graph in this report that deal flow is starting to normalize. We know of one company that stopped looking at acquisition opportunities because they were “knee-deep” trying to integrate five acquisitions over an 18-month period. As an investor, the hard part of consolidating an industry is not the buying of the companies but rather executing a successful integration.      

In Conclusion
As participants at this year’s Restoration Industry Association tradeshow, the AH team talked to many consolidators that are still looking to add to their platforms. However, we sensed a new desire to be more selective with acquisitions as the platforms grow. On the seller’s side, there is concern that these newly created national players are going to begin competing with them in their historically protected market. The decision of when to sell can be driven by the knowledge that things will change quickly if one of the bigger players enters their market by buying a local competitor. Even as industries like HVAC and plumbing reach the later innings of consolidation, there is still high demand for strong, independent operators throughout the broader Home Services segment.  

Contact Us

Led by a team of former business operators and executives who have built and sold companies, Alexander Hutton is a boutique, middle market M&A advisory firm that has completed over 220 successful transactions. We offer a unique understanding of what it takes to run a business and an accessible team dedicated to client service. By running a high-touch, competitive transaction process for each of our clients, we are able to help them achieve their ideal outcome.

Connect with the team at Alexander Hutton and talk to us about the future of your company.

Alexander Hutton
1301 5th Ave, Ste 3405
Seattle, WA 98101
info@alexanderhutton.com

(206) 341-9800

www.alexanderhutton.com