Given its history of deadly wildfires, Southern California takes fire safety very seriously. State law requires landlords to place fire extinguishers at intervals of 75 feet in most buildings, and equipment must be rigorously maintained. This fire-safety company services extinguishers, sprinklers, alarms, and automatic fire systems for 15,000 commercial and 5,000 residential clients.
The owner launched the company in 1986, and he has bought and sold parts of the business over the years. Since 2005, he has acquired 12 fire-services companies, bringing total revenue from $3.6 million to $7.2 million; he typically pays 25 percent of the purchase price as a down payment, with the balance due over several years. The owner says there are many more deals worth pursuing--he has identified at least 30 acquisition targets. "A lot of guys in this industry started out in the ?60s, and they've all come to me to sell their business when they want to get out," he says. At age 62, he is looking to slow down, too, although he is willing to advise a new owner on future deals.
|Revenue||$3.6 million||$6.4 million||$7.2 million|
|Number Of Accounts||8,000||16,000||20,000|
*Earnings before interest, taxes, depreciation, and amortization.
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THE ASKING PRICE:
$8.5 million, which includes 25 vehicles and equipment inventory valued at $750,000. The owner will finance a portion of the sale. He is also willing to spin off the residential business ($800,000 in revenue in 2007) and lower the price to $7.5 million.
Service companies such as this one often sell for one times revenue plus inventory, according to Tom West, author of the Business Reference Guide. The owner says the company is on pace to do $7.8 million this year, which would justify the asking price.
The business boasts recurring revenue and gross margins of 40 percent to 50 percent. And with each acquisition, the company has found cross-selling opportunities (providing alarm testing to a customer of a sprinkler company, for example).
To the extent that the business pursues organic growth, the struggling local real estate market could hurt it. Orange County's office vacancy rate is one of the fastest growing in the nation, and the subprime mortgage crisis has hit hard as well.
THE BOTTOM LINE:
Merging companies can be a financial and cultural nightmare, which makes a roll-up a challenging business to run. A buyer should have experience in managing a service company of this kind, as well as ample capital to fund future acquisitions.