Every contractor dreams of growing a successful business, but very few build one that is actually worth buying. Many entrepreneurs are hyper-focused on income, income, income, often overlooking the critical dimension of the outcome—what is possible with the asset they are building.
We recently hosted Brian Franco, Managing Partner at Meritage Partners, an M&A advisory firm that has completed over $2 billion in transactions across multiple industries. Franco, the author of the book The Inevitable Exit, shared a master class on how home service professionals (including those in roofing, HVAC, and plumbing) can build, scale, and eventually sell their companies for maximum value.
Here are the key takeaways for building a business that investors will love.
1. Plan for the Inevitable Exit
Franco emphasizes a crucial truth: every owner will exit, either by design or by default. Whether you plan to sell externally, pass the business down to your children, or transition it to your leadership team (potentially through an Employee Stock Ownership Program, or ESOP), all roads lead to an inevitable exit.
The central question is: Are you going to exit on your terms, or on somebody else’s terms?.
For many owners, an exit is a way to collapse time. By partnering with a larger strategic buyer, a company that might have taken years to grow to a higher valuation can achieve its destination much faster and with less headache, often growing at an average rate of 130% a year after an M&A transaction.
Understanding Your Valuation: It’s All About the Multiplier
It is common knowledge that if you increase your EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), your valuation will go up. However, that’s only half the equation.
To determine a valuation, investors take your EBITDA and multiply it by a factor (e.g., four times, six times, or even ten times). The key is understanding how to impact and increase that multiplier.
The differentiator is the investor’s perception of your company. Do they perceive a business with high levels of risk, or one that features predictable revenue streams, continuity, and the ability to be transitioned to a larger growing company?.
Franco’s book, The Inevitable Exit, distills these factors into seven value drivers that determine your multiplier.
Biggest Deal Killers: The Risks Investors Avoid
During due diligence, investors are intensely focused on risk. Franco shared some of the biggest “deal killers” that can lower a valuation and lead to less favorable deal terms:
- The Owner as the Key Person: If you are the key person in your business and intend to sell, investors will perceive that as a major risk if you leave immediately after the sale. To counter this, owners must “work themselves out of a job” so that the company can be transferred and run effectively regardless of who owns it.
- Revenue Concentration: This occurs if a tremendous amount of your revenue (over 25%) comes from just one customer. In the home services space (especially roofing), concentration risk can also involve the payer, such as when a company relies too heavily on one or a few insurance companies.
The Investor’s Obsession: Predictable Revenue
Investors love predictable revenue streams. This is challenging in the home services space, as external factors like the economy and storms (which drive insurance-paid work) are unpredictable.
Predictability, therefore, must be built into the operational structure of the company. This means building a marketing machine—with sales reps, systems, and disciplined ad spend—that creates steady lead flow and converts those leads into contracts. If an owner can prove that they stick a dollar into the machine and $18 comes out the other end every time, that machine becomes predictable regardless of the weather.
The Retail vs. Insurance Blend
When discussing roofing companies, whether a retail business or an insurance-based business gets a higher multiple is a controversial topic. The ultimate conclusion, according to Franco’s observations, is that it doesn’t matter which model you choose, but a blend is usually best.
An equal blend of 50% retail work and 50% insurance-paid work is often the ideal balance. This mix removes the “lumpiness” of revenue and proves to investors that the company can service the market even when no storms are present.
Marketing, Data, and AI: The Valuation Levers
Marketing is one of the strongest levers for valuation when it creates measurable and consistent results. While many construction companies are underdeveloped in this area, often spending only 1% to 2% of top-line revenue on marketing, private equity companies understand that pumping up marketing is a key growth strategy.
Investors want to see that the marketing system is transferable. Key metrics they evaluate include:
- CAC (Client/Customer Acquisition Cost): The efficiency of earning a client.
- LTV (Lifetime Value): How many services you can sell to a customer over time.
The technology stack of a company, including the use of AI, also affects valuation. If systems like CRM, automation, and AI tools lead to higher profit margins and efficiencies—such as AI agents for appointment confirmations or using tools to speed up insurance claim documentation—the company will be valued higher. However, if the technology is inefficient or not profitable, it works against the valuation.
The Future of Home Services M&A
The home service market is expected to continue consolidating over the next five years. This process is mirroring what happened in the water and fire damage restoration space, where thousands of segmented companies were consolidated into a handful of national players.
Investors are looking to take fragmented industries like roofing, HVAC, and plumbing and create multi-state and national organizations. This is partly driven by insurance companies, who prefer to deal with one or a handful of large national contractors rather than thousands of smaller ones across the country.
Resources for Your Inevitable Exit
Franco advises that if you are considering an exit, you must determine what you are exiting into. Whether it’s retirement, another venture, or partnering with a growth capital group, understanding your goals is crucial.
Brian Franco and Meritage Partners offer resources to help contractors build highly transferable businesses and attract top-quality investors:
- The 10 Deal Killers List: A free gift outlining common mistakes seen in M&A transactions, available at inevitableexit.com.
- AI Valuation Tool: An assessment tool found at applebytes.ai, which offers a free version to determine your company’s valuation range and a paid version with actionable advice on improving the business to increase that valuation.
