Recurring revenue and multiple avenues of growth are among the reasons specialty services companies are generating interest from private equity firms. And working with entrepreneur-led businesses presents a unique set of opportunities and challenges.
From landscaping and veterinary clinics to waste management and security, specialty services companies span a wide range of industries. These businesses frequently have a regional footprint and seek outside resources to help expand their geographic reach and service lines, says Brett Holcomb, a principal with private equity firm Prospect Partners LLC in Chicago.
Prospect Partners invests primarily in lower middle-market companies, which the firm supports in many areas, including organizational development, financing structures, strategic planning and business development. For Waste Harmonics LLC—its waste management services portfolio company outside of Rochester, New York—Prospect Partners helped the management team create and execute a strategic plan and close three add-on acquisitions that significantly expanded the company’s reach throughout the U.S. and Canada and more than doubled its revenue since 2015.
Investment success in the lower middle market has a personal component, too. It requires relating to business owners and understanding their perspective, which comes naturally to Prospect Partners. “We speak fluent entrepreneur,” Holcomb says. “That’s because we’re entrepreneurs ourselves and we understand the nuances of growing smaller businesses—as well as what keeps owners up at night. This knowledge leads to comfort and trust in our ability to provide realistic, level-headed and consistent guidance as a true partner.”
Private equity firms and their advisers also have a role to play in creating space for founders to do what they do best, says Matt Petrucci, partner and leader of transaction services at Plante Moran, the national audit, tax and consulting firm that has worked with Prospect Partners for many years.
“Entrepreneurs are often frustrated because they have to spend too much time managing rather than doing what they love, which is typically being immersed in their business,” he says. “We can free them up so they can focus on these things based on our wide range of capabilities to support their top line as well as their operations.”
“It is enormously fulfilling to develop such strong personal relationships with management, help them achieve their goals and set the stage for their company’s future growth and continued success.”
Principal, Prospect Partners
Filling in Gaps
Private equity firms and M&A advisers can help entrepreneurs in other areas, too. For one, founders may need help adapting to trends in their industry. Business customers and end-users alike expect advanced technology and data tools, but lower middle-market companies often require guidance on how to develop and offer these solutions.
“So many of these specialty services companies have the data but don’t have the staff or skillsets to leverage it,” Petrucci says.
When Prospect Partners first invested in Waste Harmonics, the company was collecting a lot of customer waste-management and waste-usage data, but it needed further investment in systems and people to analyze the data. The additional investment resources enabled Waste Harmonics to hire its first chief operating officer, a vice president of vendor relations, and a team of data analysts. The result: robust dashboard reports and new data-collection equipment, such as proprietary sensors for waste management containers that provide real-time, on-site measurement of waste usage. The data help Waste Harmonics’ customers not only better manage their waste spend but also improve their sustainability footprint.
‘Do Your Homework’
Mergers and acquisitions consulting is another area of guidance. Many parts of the specialty services industry are highly fragmented, which makes it prime for a buy-and-build strategy, according to Petrucci. “There are lots of paths you can go down in specialty services. You really need to do your homework in order to pick the right ones that drive value not just when you buy, but when you sell in the future.”
Private equity firms like Prospect Partners work with entrepreneurs—who often lack experience in mergers and acquisitions—to identify add-on investment opportunities, negotiate, finance, and close the deals, and then help guide the integration of the businesses into the entrepreneur’s company. They also can help entrepreneurs understand the future exit process and identify the best potential partner for the next phase of the business, Holcomb says.
Staying True to Roots
Part of Prospect Partners’ role is helping its portfolio companies maintain their cultural identity while they expand. Under the firm’s ownership, Wedgewood Weddings, a provider of wedding and banquet services, has doubled its number of locations. Through this rapid growth, Prospect Partners helped the company develop standardized organizational processes to ensure all its venues adhered to Wedgewood’s operating philosophies of value, service and convenience.
“Wedgewood’s culture is high-energy, and employees have tremendous enthusiasm and passion for creating the perfect wedding for each client,” Holcomb says. “Management wanted to make sure customers have the same great Wedgewood Wedding brand experience whether they get married in Fresno, New Hampshire or Colorado Springs.”
Partnering with entrepreneurs in the specialty services space is highly rewarding, Holcomb says. “It is enormously fulfilling to develop such strong personal relationships with management, help them achieve their goals and set the stage for their company’s future growth and continued success. It’s why we have dedicated our careers to investing in the lower middle market.”