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October 30, 2018 Video 5 min watch
Why are entrepreneur-backed specialty services companies generating interest from private equity firms? Watch as we chat with Prospect Partners on why this fragmented market is prime for a buy-and-build strategy.

Entrepreneur-backed specialty services companies are generating strong interest from private equity firms, largely due to recurring revenue and multiple avenues of growth. From landscaping and veterinary clinics to waste management and security, investments in specialty services companies spans a wide range of industries.

Chicago-based Prospect Partners is achieving investment success in this niche market by helping these oftentimes fragmented businesses expand their geographic reach and service lines. But working with these businesses presents a unique set of opportunities and challenges. Watch our video. Then read more at ACG Global Middle Market Growth.

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Full video transcript below:

Prospect Partners investment in entrepreneur-backed specialty services proves successful

Brett Holcomb: We at Prospect Partners invest in a wide range of industries from niche manufacturing to distribution to specialty services. Within the specialty services industry we have a number of different companies, ranging from wedding event planning businesses to veterinary care hospitals.

Matt Petrucci: Trends that we continue to see in mergers and acquisitions specific to companies in the lower middle market…it's that the service industry is still highly fragmented, which makes these businesses prime for a buy and build strategy. And so we continue to see more and more attention being paid to these types of businesses, certainly as other industries such as healthcare continue to be more and more competitive, which continues to drive up the purchase prices.

Brett Holcomb: M&A activity in the specialty service space remains very active today. The extent to which specialty service companies are able to demonstrate growth in a variety of areas — certainly helps on the valuation side. Recurring revenue is becoming increasingly important, as is the emphasis around culture, demonstrated ability to scale the organization beyond where it was, as well as their pursuit of add-on acquisitions certainly helps maintain those valuations.

Having done about 150 acquisitions across 20 years, we've got a lot of experience, and it tends to fall in four separate buckets.

  1. The first is organizational development. We spend a lot of time with our teams really working through where to add senior resources.
  2. We also spend a lot of time on strategic planning. We work with our teams there on how to grow, how to get from point A to B.
  3. We spend a lot of time on the financial side of our business, helping our teams balance debt and equity and making sure they have ample capital for growth. At a company like Innovative Pet Care where we grew from one location to 13 locations over a handful of years, we had to make sure we had a lender that understood how that would work and had to make sure that we had a team that had ample access to capital.
  4. And last but not least, we spent a lot of time on what we call business development in general, that's pursuing add-on acquisitions. A company like Bland Landscaping are leaders of that organization, had known how to build the business, but had never done an add-on acquisition. So partnering with someone who knew add-on acquisitions was something that they are very intrigued about and ultimately helped them decide to choose Prospect Partners.

Matt Petrucci: It really starts with leveraging big data. Certainly, within the industry we've been hearing more and more about big data and companies that are in the lower middle market often don't have access to that data, don't have the skill sets to leverage the data, or even the time and the staff to do so. So Plante Moran can help there.

Brett Holcomb: On the technology side, we have portfolio companies like Wedgewood Hospitality Group, our wedding business in Temecula, California that has spent a lot of time on their digital marketing, on buying and implementing tools to allow for better SEO, new CRM systems, ERP systems.

Matt Petrucci: We first need to make sure that we understand their investment thesis, why they purchased this company, and what is their vision for growth. And then certainly as we provide our services, we need to help them determine if that company is ready to execute on their strategy and if they're ready to absorb that growth, and if not, what is needed. It could be a more robust IT system, an increased ability to leverage big data. We've even helped some companies build a strategic plan from the ground up.

Brett Holcomb: The biggest challenge is frequently working within specialty services, but really entrepreneurs in general across the portfolio is helping them build trust, understand the role we're playing while also encouraging change.

We also really need to make sure that the culture that they have developed over time continues as a company grows. This focus on culture's incredibly important. A company like Wedgwood Hospitality Group, we spend a lot of time on our board meetings continuing to drive home the points around value, convenience, and service. All points that were important when we originally got involved and are even more important now that we've doubled the number of locations.

M&A activity in the specialty service space remains robust. There's a lot of activity and valuations remain high. We're certainly benefiting from baby boomers retiring, from add-on acquisitions for existing portfolio companies, and the extent to which they have succession plans has also allowed us to pursue some additional platform activities.

Working with entrepreneurs is all we do. We spend our entire careers focused on this segment of the market and love this segment of the market. We pride ourselves on speaking fluent entrepreneur. We know what keeps them up at night. We're entrepreneurs ourselves and understand the challenges that come with managing small businesses.

Matt Petrucci: Things that private equity groups really need to understand when investing in this market is, it's really important to pick your spot. There's lots and lots of different paths to go down. And so you really need to look at the industry, how fragmented it still is, if those businesses are still prime for a buy-and-build strategy, is pricing still relatively low, and then is there enough momentum in that space to where upon exit pricing will be higher as you're selling now a larger and more complex company.