Construction Generates Income. Service creates wealth. With all the acquisitions and rollups in the construction contracting industry today, having a short discussion about earnings before interest, taxes, depreciation and amortization (EBITDA) is very timely.

Most valuations of businesses include their EBITDA multiplied by some chosen number. If potential buyers think, for example, that an appropriate multiplier should be six, a company with an EBITDA of $1 million has a market value of $6 million.

EBITDA was invented more than 50 years ago by cable TV systems legend John Malone as he bought up cable television companies on his way to becoming a multibillionaire. He insisted that EBITDA provided the best way for his investors to size up the cable companies he was acquiring. 

Of course, the underlying value of those companies was based on the number of subscribers they had. The more subscribers, the greater the value in the total combination of Malone’s cable TV companies, which he eventually sold in 1999 for $48 billion, or nearly twice that amount in today’s dollars.

In a similar way, the larger the customer base that an electrical contractor’s service and maintenance business has, the greater the valuation of that overall company will be.

The contractor’s new construction business will, hopefully, generate profits. But it will not contribute to corporate value in nearly the same manner. 

To gain an expert view of how service and maintenance can build value and therefore create wealth in a specialty contracting business, we stopped for coffee with Robert Kirkpatrick, managing partner and founder of Broadside Advisors, Ashburn, Va., who specializes in mergers and acquisitions in the industry.

In our column over the past 14 years, we have insisted that a contractor’s service and maintenance business increases the valuation of the company by growing its customer base. The recurring revenues, stronger margins and better cash flow the contractor enjoys from service and maintenance exceed returns from new construction. But the customer base that yields them is the bedrock foundation for the company’s corporate valuation.

At Broadside Advisors, we provide mergers and acquisitions advice to electrical contractors and HVAC contractors. Their average revenues split between new construction versus service and maintenance always makes a big difference in whether buyers are willing to pay a premium for a company—or whether a deal gets done at all.

Most contractors we talk to are working at capacity. Many have told us that they are regularly turning down opportunities to bid on new projects because they cannot staff them. We always hope that, in these boom times, ECs are more profitable than ever.

Even when a company has had great topline income figures and better-than-ever profitability, potential buyers may not be interested in a contracting company that has concentrated on new construction and has a limited number of customers. Probably the top two reasons a potential buyer passes on a company is the amount of new construction and the customer concentration that usually creates.

Mind you, project or fit-out work on existing buildings is looked on more favorably than new construction, but still not as favorably as service and maintenance. 

In this column, we have advocated for contractors to promote cross-selling between their new construction business and their service and maintenance business. New construction can be their best “salesman” for service-related activities, which can go on for years after a new building is completed.

No doubt. At Broadside, we completely understand how cross-selling can work to a contractor’s advantage. But if too much of a contractor’s revenue mix is vested in new construction, it can reduce the attractiveness of a deal, even if the new construction is with long-time customers.

Our mission has been about developing ECs’ service and maintenance businesses. It’s not about selling their companies.

Likewise, I spend a lot of time helping electrical contractors who are not ready to sell their companies but would like to be ready for some future day when that possibility arises. You know, it used to be hard to sell a well-run electrical contracting business, but not as much today—there are new buyers every quarter. We get involved with companies at this stage to help position their firms for the future, before helping them sell their firm later on.

That brings us back to EBITDA and multipliers. We know that service and maintenance creates value more than any other business activity. Is there any segment of electrical work contractors should concentrate on?

Not really, though specialized and high-growth segments get more attention—think electrical testing or data centers. The biggest determinant of success is how well you run your business, no matter what type.

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