Patrick Galleher is the CEO of Boxwood Partners, an investment bank in Richmond, Virginia, where he leads sell-side transactions.
Even in difficult times, it’s important to continue to move forward and believe there is something better on the horizon. For entrepreneurs and investors, this means finding the silver lining in any situation and making the best of it.
As we place our focus on the future, one thing my peers and colleagues frequently ask me is which investments show promise right now. I serve as managing partner for a middle-market investment bank, and I’ve learned a thing or two about what to look for when considering potential investments.
When asked about where I’m looking to invest, I tell them about home services franchises, which focus on home improvements, repair and care. Without the need to rely on tangible goods, home services franchisors are well positioned to not only weather an economic downturn, but come out on top.
These are a few of the reasons I’ve noticed when it comes to why home services franchise investments may make sense both now and in the future.
Home Services Are Not As Impacted By The Economy
One of the biggest advantages of the home services industry is its necessity. With the essential nature of many home services, these businesses don’t find themselves as beholden to the state of the economy as some of their peers.
Much of this is because many services are still required whether the economy is doing great or not. Floors still need to be repaired, and the plumbing isn’t going to take care of itself. The same is true of yardwork.
In fact, I recently worked closely on the sale of a leading tree care franchisor to a parent company specializing in home services franchises. If the sale has shown me anything, it’s that necessity positions these types of businesses to flourish while other franchisors flounder.
Success Is Dependent On Demand
However, home services franchises are not immune to marketplace fluctuations. The success of these businesses hinges on demand for their services. This is especially true depending on whether a franchise uses recurring revenue compared to per-project billing.
Businesses using recurring revenue can rely on consistent monthly billing cycles to help keep things afloat, even when times are tough. That’s not to say companies using recurring billing don’t feel the pinch during a recession. However, the regular monthly income often means they have budgets and plans in place to tough things out.
By comparison, businesses that rely on project billing may or may not have room to maneuver if an expected windfall ends up falling through. Some franchises may have the wherewithal to ride it out, while others may find themselves in dire straits.
This is why it’s so important to thoroughly vet any investment. That means reviewing at least three to five years of financial reports and carefully analyzing the business model and how it’s expected to perform in a variety of scenarios, both good and bad.
A Booming Housing Market Creates Even More Demand
Against all odds, the housing market is booming in 2020. Much of this is due to the incredibly low mortgage rates meant to buttress the industry against the pandemic. Now, the Fed has announced that low mortgage rates are here for the long haul. When you couple this with the trend of people leaving big cities, it’s reasonable to expect the rates of homeownership to continue to increase for the millennial generation.
They say that a rising tide lifts all boats, and reports show the strong housing market having a ripple effect that is spreading to other industries. Sales at home improvement retailers are up, and those who are not do-it-yourselfers will likely hire a pro for their next home improvement project.
Remote Work Is Here To Stay
There are many businesses already looking at how to safely return to work. There are also just as many that don’t expect employees back in the office until 2021, if at all. This is what Google and Twitter have done.
Continued remote work means even more time at home for a large portion of the workforce. Once you work from home full time, you realize that a laptop at the kitchen table isn’t going to cut it. This is sure to lead to an increased need for functional home offices.
With so much time at home, it makes sense to make that space as nice as possible. Whether it’s a much-needed repair or a long-overdue upgrade, more people are willing to spend on home improvement services.
And it’s more than repairs and renovations being made to homes. Cleaning services have also been in high demand in a trend that is likely to continue as cleanliness and sanitation become an ever-growing part of people’s lives.
Valuation Can Be In The Eye Of The Beholder
As with anything, it’s important to remember that home services franchises are not without their caveats. For one thing, unlike other investments, it can be trickier to provide an accurate valuation. This is because assets in a service-based business tend to be less tangible than other industries.
You’re providing a service, not a product. This means there’s no inventory to hang a valuation on. Instead, you’ll need to rely on something like EBITDA as a valuation metric to give you a better idea of an investment’s worth.
In Good Times And Bad, Home Services Show Promise
This is all to say that while home services were vital to people’s lives before, their necessity has only grown in 2020. No one is sure what things will look like when the country returns to the “new normal.”
Even so, the ongoing need for home services is something that will remain a constant. While I’m confident the world will return stronger than ever, I’m also betting that home services are an investment that will make sense both today and tomorrow.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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