Building Service Contractors Weathering Covid Successfully
It has been over one year since the now infamous Covid 19 began to inflict immeasurable pain and suffering on the World. It is not over yet, but we have come a long way. The future is still somewhat uncertain, but things are looking brighter.
As in other industries, the building service industry has had to think fast, innovate and deal with countless obstacles, including the long - lasting lockdowns and the difficulty with hiring employees. Depending on the profile of a service company’s customers, the effect ranged from negligible to severe. Commercial office building space occupancy was decimated. Occupancy levels have been at an all-time low. Office workers worked from home. Many still do, but slowly they are returning. While there are regional differences in the return to normalcy, there is, as of this writing, far less gloom and doom among many.
Disinfection service has been the immediate savior for the industry, albeit probably a short-term one. In some cases, profit has soared because of the disinfection and other services provided; however, the soaring profits will likely begin to ebb, if not already started to return to normal profit levels. New companies formed for the sole purpose of providing disinfection services are being left holding the bag.
One could look upon the Covid being a good thing for the industry as managers have had to take stock of their companies, becoming aware of its vulnerability that could strike anytime, then taking appropriate corrective action. Most have lost any feeling of complacency, which is a good thing.
The building services industry, as in others, one has to consider the effect of Covid on market valuation. Clearly, there is a Covid Effect for most companies, but it is probably not significant. The extent to which it has been positive or negative depends on several things: (1) management’s skill with regard to anticipating damage, followed by taking effective damage control, (2) devising a plan for replacing lost revenue for the short-term, (3) the market sector in which a company is engaged; some sectors being hit more severely than others and (4) a plan for the way forward.
Overall, there is probably very little valuation, if any, decline within the industry. One problem may be that company shareholders may think that the Covid Effect may increase market valuation because of the profit surge. Each case is different, but it is very unlikely that a short-lived profit surge of 20% to 30% during the Covid year will add much, if anything, to market valuation. However, the cash gained is still there for shareholders to use for another rainy day.
There appears to still be an eagerness among qualified strategic and investor buyers to acquire in the building services industry.
This is not new. Investor buyers especially have been impressed with the industry’s resilience during this pandemic, and before that, the financial debacle of 2008 - 2011. Strategic buyers are also aware of the industry’s resilience since they have experienced that resilience themselves. Acquisitions remain at a near pre-covid level, including those in progress. It should be noted that the industry has immense vitality and societal importance as evidenced by its being classified as being an essential industry when the pandemic was upon us.
There may be some hesitancy to consider selling among owners of companies at the moment because of the valuation question, plus there is the unknown tax implication of probable tax increases, especially the capital gain tax. They do not know what to expect. Some are hunkered down just waiting to see which way the wind blows, while still dealing with the lingering effects of Covid within their companies. None know what the final impact will be, however, it could be as high as 20% for those that wait to sell until 2022, or later.
The things that make a company valuable to a buyer remain the same: (1) a history of operating profitably, (2) the market sector in which they operate, (3) growth rate, plus prospects for continued growth, (4) proven, capable management, (5) customer concentration as a risk factor (5) the market area in which they operate and finally, (6) how the acquired company will fit in with the buyer. Add to that, their successful or unsuccessful handling of the Covid.
The building services industry is huge and diverse. It is thought that there are 40,000 contractors in the USA. The market is growing at the rate of 5% to 6% annually, as new market sectors come on board. Acquisition within those companies will continue to occur, whether to a strategic buyer, investor buyer or passing the company on to family members. Considering its recurring monthly revenue, its comparatively low capital expense requirement, its recession and other calamity resistance, it is an industry comprised of companies that, if operated well, can provide its shareholder(s) a very good return on their investment and effort. I, for one, am very glad to have been part of this industry for many years!
Gary A. Penrod
Gary Penrod and Associates, Inc
843 645 1937 Office; 843 290 3574 Cell