I’m sure many readers of this publication are also readers of Peter Lohmann’s Newsletter (I know I am). While I tend to be a bit long-winded and prefer to write long-form content, Peter has put together a great newsletter for the industry that summarizes recent events, provides some quick key insights, and even sometimes breaks some industry news. I recommend a follow.
In addition to his newsletter, though, Peter has also branched out into doing some market research for the industry. You may remember the industry trends report he helped to put together with LeadSimple and some other sponsors late last year, which I discussed here. His latest foray into industry research has been in the mergers and acquisitions (M&A) arena. I’ve written about this subject previously, but we’ve never had an actual report of a significant sample size of transactions to give us real data on this. But now we do!
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Peter put out a call for voluntary submissions of acquisition data for actual closed transactions over the past five years, and he got 89 submissions. Not a bad sample size! Certainly not scientific, as it does suffer from self-selection bias, and we don’t even have accurate data on what the total number of transactions has been in order to calculate a margin of error, but nevertheless, this is the best data we’ve had to date on this subject.
Peter sent me a copy of the report and gave me the go-ahead to do a high level summary of the data here, like I’ve done with other industry reports in the past. Of course, this is just a view from 30,000 ft, and if you want to get the full details, the entire report can be purchased here at a big discount from the original price thanks to our mutual sponsor Enterprise Bank & Trust (discount code NEWSLETTER25 for an extra 25% off). Let’s dig in!
Why Does This Even Matter?
I’m sure some of you out there are wondering why we even care about this data. Many of my readers are not looking to be big dogs in the M&A space in our industry. At PMAssist, we’ve long been the champion of the small PM firm not looking to take over the world, after all. But it’s important to note that even small firms can take part in M&A transactions, and many of you will also be looking to exit our business and sell at some point. Having this data is incredibly important in both scenarios.
I remember when I first started hearing about M&A in our industry, probably about a decade or so ago, we were all relying upon “conventional wisdom” that a PM company would sell for about $1,000 per door. Some would be a little more scientific about it and say one year of management fee revenue (but no other revenue). Of course, this was before the age of fee maxing, before NARPM’s Benchmarking Report and Accounting Standards, before the rise of PM Facebook groups, etc. The landscape has changed significantly, and along with that change has come an increasing realization of the value of our businesses. As a result, those old rules of thumb don’t really matter anymore.
So what filled the void was rumor of what transactions were going for. The newest conventional wisdom that I’ve heard most often is “1 to 1.5 times revenue.” If you listen to someone who actually knows what they’re talking about, you’re likely to hear multiples of EBITDA, and numbers between 3-6x EBITDA have been commonly thrown around. But these are still just conventional wisdom, not data. It’s basically been as reliable as that quote from Ferris Bueller.
Now we have actual data. Again, still suffering from self-selection bias, but data nonetheless. And we can probably draw certain inferences as to what self-selection bias would do to the data, which I’ll get into.
Scale Matters
The first key insight I drew from the report is that scale matters. Peter identified a tipping point at about the 350 door level where revenue multiples increase significantly. Effectively, you can expect to get about a 20% higher price on your business if you’re over 350 doors.
For those planning to exit at a certain point in the future, this gives you an aiming point. You obviously want to exit at the best multiple possible, so if you’re sitting at say 275 doors, you know that you’ll want to kick into high gear and add another 75+ doors before selling. You’re leaving money on the table if you don’t.
Peter is just presenting data and doesn’t get into the rationale for this, but the reason for this tipping point is pretty clear to me: if a buyer (especially a roll-up buyer) is looking to open up a new market from scratch, then starting out with a critical mass of doors that provides enough revenue to support a full local operation, including a senior manager, is critical. At only 200 doors, it’s difficult for a big roll-up operation to put senior management boots on the ground profitably. The extra 150 doors covers that compensation package and then some, giving them breathing room. That makes it more valuable, and it opens up the available buyer pool to more than just those buyers who already have a local operation. With an increased supply of buyers, the demand for your operation goes up. Basic supply/demand curve stuff.
Who’s Buying?
There’s definitely the feeling out there that M&A activity has been concentrated among a few big “roll-up” players. A roll-up is basically an M&A strategy of going out and buying up a bunch of PM companies to combine them into a much bigger operation of tens of thousands of doors. Think HomeRiver Group or Evernest, both now over 20,000 doors nationwide.
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Not surprisingly, the report confirms this feeling. Of the 89 transactions covered by the report, over two-thirds were by the roll-up players. However, we shouldn’t read too much into this. Remember, this report suffers from self-selection bias. All it takes is one big roll-up player to participate, and they can submit a bunch of transactions, while the smaller players who participate probably only have one or two transactions to submit. Just by the nature of their business and their strategy to acquire lots of smaller companies, the roll-up players are obviously going to be able to contribute more to the report.
That said, there was another interesting bit of data in here: the smaller players are paying higher multiples on average than the roll-up players are. I can think of many reasons for this:
Typically a roll-up is buying into new markets, while a smaller buyer is usually buying someone in a market where they already do business and can “tuck in” that new acquisition under their already existing portfolio very efficiently
Roll-ups usually have to answer to investors (VC or PE money) who are keeping a close eye on them, while smaller players can make bigger moves without having to answer for it
Smaller players have less to offer outside of the purchase price; for example, a roll-up buyer may be able to offer the seller an “executive” position in the roll-up company with an ongoing salary, or they may be making big promises of future returns on stock that they may be able to offer in addition to cash; as a result, the smaller player has to offer more straight cash
Regardless of the reason, this is something you should consider when looking to exit. I remember one PM in Atlanta a few years ago who was looking to sell his business. I heard he was talking to all of the roll-up players, so I reached out to him and offered to buy him lunch to discuss a potential acquisition. He straight up turned down the meeting, saying that he was “only interested in national players.” That’s who he sold to, and while I haven’t asked him if he has any regrets, I know quite a few others who sold to the same “national player” who have deep regrets today about that decision. Don’t ignore the local players who want to buy you. Most likely, they’ll offer you more money, and the big grandiose promises of the big guys are unlikely to materialize.
Odd Hidden Multipliers
The report also highlights some odd variables that seem to jack up the multiples paid, including timing and geography.
I don’t know which companies participated in the report, but based on the number of California transactions included, I suspect either PURE or Poplar were involved. Both engaged in a lot of California roll-up activity (god knows why). The report shows that the California transactions (and also Oregon) had a much higher average multiple than the rest of the country, coming in at more than a third higher than average. The report calls this a “strategic advantage,” but I’m not so sure. I think this is more likely simply a result of the founders of these roll-up companies being already based in California and sticking to what they know with a willingness to pay more for it. Until the purchase of Poplar, Evernest had previously eschewed any California acquisitions, in fact. But there are some actual advantages to these markets. For example, the report shows that Indiana appeared at the lower end of multiples. Why is this? I would wager because Indiana is a major investor’s market, and that means these PMs tend to have much greater portfolio concentration (the average number of doors per owner). Greater portfolio concentration equals greater risk. By contrast, California is the original accidental landlord market. Nobody in their right mind intentionally invests in California real estate, so PMs there are almost universally managing for accidentals. That means portfolio concentration is low, very close to 1 door per owner, which is a very low risk portfolio. So this isn’t entirely irrational, although I would say that the negatives of the California market (out of control regulation, inability to charge ancillary fees, frequent and unreasonable audits, etc.) outweigh any sort of advantages. Nevertheless, the sales there have gone for higher multiples, so if you’re looking to sell in Cali, be sure to get what you’re worth!
The other hidden variable was time of year. Very few transactions are taking place in the 3rd quarter, but damned near half are taking place in the 4th quarter. Now, with the number of transactions we’re dealing with here, this may just be statistical noise. But we don’t know that for sure. So there may actually be value in sellers timing their exit plans for near the end of the year. That likely means putting your PM company on the market in mid to late Q3 to allow time for buyer inquiries and due diligence.
The Game of Profit
The most interesting bit of data to me was that companies with profit margins exceeding 20% got a profit multiple premium over companies with lower margins. To me, this is counterintuitive, but I’m a Warren Buffett value investing fan. I look at a company with a higher profit margin and I see less opportunity for profit growth, but most investors are growth investors (I think foolishly), so this isn’t exactly surprising data. People do tend to have a psychological predilection to paying more for things that are already more profitable, even if that means they don’t have as much room for additional profit growth. Buffett has been making more money doing the opposite for over 60 years, but nobody ever listens to him, so here we are. For a seller, the moral of the story is to juice your profits before selling. If you know you want to exit in two years, cut expenses and ramp up revenue now so that you can show two years of data at that higher margin.
Recommendations for Sellers
With all of this data in mind, let’s look at some key recommendations for those of you who are considering selling:
Get your company above 350 doors
Get your profit margin above 20%
If you’re in a less desirable market, make sure your portfolio concentration isn’t too high
Don’t discount the smaller players; only marketing your business to the big roll-up players will likely cost you money
Aim to put your company on the market around the 3rd quarter with the goal of closing in the 4th quarter
I won’t focus on recommendations for buyers, because frankly, I discourage 90% of you from being buyers. As I’ve said in prior articles, these acquisitions are not generally all that cost-effective compared to organic growth. It costs the average PM company somewhere around $1,500 to acquire a new door, all-in, organically. While a handful of the transactions in this report were at lower per-door cost, the average was well above that, and the highest was an insane number in excess of $8,000 per door (whoever made that decision at that roll-up buyer needs his head examined).
A Note About Self-Selection Bias
Self-selection bias is the idea that when data is collected from voluntary contributors rather than from a scientifically representative sample, the data may be skewed due to certain factors that might have led to those people being more likely to participate. For example, there is always the possibility that people were more likely to contribute if they felt that their deals were “better.” In other words, if they were an acquirer, and they thought that they negotiated a masterful deal that they were very proud of, they might have been more likely to participate than someone else who later regretted the deal that they made.
That said, if self-selection bias did play in here, we can make certain inferences about that. First, it is likely that acquirers were more likely to participate than sellers, because sellers likely aren’t very involved in the industry anymore and probably didn’t even know that Peter was soliciting input. So we can assume that most data came from acquiring companies.
From that conclusion, we can assume that the data might be skewed towards lower valuations, as acquirers would be more proud of better deals that they made, which from their perspective would be at lower multiples. That means that average multiples might be a little higher across the industry in reality than the report shows.
That said, I suspect that these factors are relatively minor. The results of the report fall into line with what I would expect, and I’ve been involved in a number of deals as an acquirer and as a consultant helping acquirers. I think this data is probably pretty close to reality, if not perfect.
Future of M&A in PM
I think we’re already past the peak of M&A in our industry. It occurred right around the time PURE entered the scene in 2020 and the next few years, and has fallen off significantly since then. Some of the roll-up players, like Poplar, have already been gobbled up by other roll-up players. When the drivers of consolidation are themselves being consolidated, that tells you that we’re past the peak.
That said, there are always opportunities out there, particularly for the smaller players in their local markets. This report shows you that while some multiples are crazy, most are relatively reasonable, so you have some real opportunities for growth in your local market or expanding to other markets in your state. If you’re looking to expand outside of your general area to brand new markets in other states, I think this report is also sending you the signal that the bigger players figured out that somewhere around 350 doors is the threshold. Make sure you’re buying into that market with that many doors so that you can support that new operation. I still say that organic growth is king, but if you are insistent upon faster growth than organic can provide you, then learn some lessons from the report first.
I don’t foresee any of the big roll-up plays paying off like they had hoped. No, as I always said, nobody on Wall Street is willing to pay you a 15x multiple for your service business, even if you try to pretend it’s a tech business. It’s just never going to happen, and you were either delusional or lying to sellers when you told them that it would happen. Don’t buy into this nonsense. If you’re selling to a roll-up player, demand cash, not stock. You’re never getting that 15x, or even 10x multiple on your money. If that’s the multiple you want, find a top tier PropTech company and invest with them. Your odds still aren’t good, but at least they aren’t zero. So get your cash up-front, not a promise of a big payout on stock later.
My other message is to those of you who have stubbornly insisted that PM companies are undervalued for years. “I’m not selling because the multiples are too low. I’ll wait until we’re getting 8x revenue.” Folks, this is delusional, and it’s always been delusional. PM is a straight service business. What do traditional service businesses get? The average revenue multiple for a traditional service business is only 0.8x. The only businesses that break a 1x multiple are financial services businesses, and they just barely break 1x. You have spent way too much time looking at tech companies and drooling over their high multiples, but even those have plummeted in recent years. Once reaching nearly an 18x average multiple during the pandemic years, they’ve plummeted back down to their more “normal” levels of about 7x. But no other business gets these multiples. None. Investors love SaaS companies because of the recurring revenue, the near non-existent churn, and the extremely high gross margins. In other words, if you pull out all of the money spent on development and marketing, and just hold on to your existing customer base for as long as possible, a typical SaaS company can generate a 50% net margin for years. Your business has absolutely no resemblance to that business. PM companies have extremely high labor costs, extremely high churn, and high customer acquisition costs. And that’s if you’re doing everything right. So if you want to exit, don’t sit around waiting for a crazy 8x multiple. Multiples are unlikely to ever get much better than where they are right now. Make the move if you want to exit. And if you don’t, sit on your little cash cow and enjoy it. That’s what I intend to do.
Get the Full Report
Obviously the full report has a lot more data, and a LOT more of the charts like the one I posted above. If you’re looking to get those full insights, you can buy the full report here. Don’t forget that discount code (NEWSLETTER25). Of course, be sure to sign up for Peter’s newsletter also and listen to his podcast. Peter and I don’t agree on everything, but he’s always worth a listen.
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Debate Me
Disagree with my take here? Have a different perspective? There’s nothing I love more than a good debate or even just an intelligent conversation. If you’d like to jump on a podcast recording with me to discuss this topic, please let me know!
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