Gary Penrod and Associates
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News and Views from GPA:

Stay Tuned Newsletter - Summer 2015

The M&A Sector of the
Building Services Industry

Observations by - Gary A. Penrod

Gary Penrod and Associates, Inc.
843.681.6588 x 11

Market Sector and How It Affects Market Value

More often than not, prospective buyers that are interested in acquiring a building services company express interest in companies that are engaged in providing services to specific market sectors. The preferences often expressed that are more common include: life sciences, medical, high tech and education both K-12 and higher education. To a lesser extent, but still somewhat common, are the hospitality and other niche market sectors. Many of these market sectors have less contractor penetration, that is, there are fewer contractors that are engaged in the sector.

Why this preference? There are many reasons for this, but overall it reflects the reality of the market place and the experience that strategic buyers have had when engaged in providing services for the more common sectors of the recent past. Often, it is because the newer market sectors offer a higher customer retention rate and, because of this and other reasons, are more profitable. That does not necessarily mean that the older, more highly penetrated market sectors can’t provide high retention, because they certainly do. However; the fact is that the more highly contractor penetrated sectors are more competitive, driving service prices down.

Following is my estimate of contractor penetration for various market sectors:

1. Multi-tenant commercial office space that is managed by external management groups – 90% (+) penetration

2. Multi-tenant commercial office space that is managed by internal owner groups – 85% (+) penetration

3. Single tenant corporate space managed by internal owner groups – 75% (+) penetration

4. Education space, including K – 12 and higher education – 45% (+) penetration

5. Life sciences (pharmaceutical), research and high tech – 45% (+) penetration

6. Industrial space, including automobile and aircraft assembly – 45% (+) penetration

7. Other space, including all niche market sectors – 35% (+) penetration.

If this estimate is even close, it is obvious that there is more opportunity in the sectors that have less penetration. For now, those sectors, while still competitive, are less competitive than the sectors with higher penetration. They tend to have a higher customer retention rate, perhaps due to having contracts that are truly multi-year, sometimes up to 5 years, plus.

I conclude that companies engaged in the lesser penetrated sectors that provide a high level of service too will tend to have a higher market value because buyers, whether investor or strategic, understand the differences in providing services among all of the market sectors.

This is all part of the industry’s evolution. While there is more opportunity today in some market sectors, that will change in time as new market sectors emerge.  GP


Regards, Gary
Gary Penrod, CBSE
Managing Associate, Gary Penrod and Associates, Inc.

PS I invite you to contact me directly about any questions or comments that you may have about what is written here.  Also, please feel free to contact me about any questions that you may have about the acquisition process, valuation, or about companies that may be for sale.  gp


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