Focused advertising and word-of-mouth referrals typically spur growth among service firms. However, these avenues don’t always lead to rapid expansion. Instead, the answer may lie in buying routes, where the questions now shift to which are most profitable, and how to identify them.
When appraising the purchase of a service route, three key areas must be considered: profitability, customer retention and seller benefits.
When purchasing a service route, one of the first decisions is who the seller will be.
Pool brokers typically charge 10- to 12 times the monthly gross revenue for each account. Independent sellers, however, may only list their routes at six- to eight times the monthly gross.
But it’s important to remember these are gross earnings, not profit. And because the bigger concern is charge rates, for many this is hardly a cost-prohibitive markup.
“My tax person says you should be buying every pool you can, even if it’s at 12 times [the monthly gross] because in no other business can you pay for [the purchase] within such a short amount of time,” says Adam Morley, co-owner of Paradise Pool and Spa Service in Torrance, Calif.
Still, Morley only buys routes that cost, at most, eight times their monthly gross. Similarly, Fred Terhune, owner of Howard’s Pool World in Port Charlotte, Fla., usually gets his routes for six times monthly gross.
“If you put [the route] against the industry average of a 15 percent profit margin, run the numbers and [conclude] it’s actually a decent investment, then it’s a fair price when you’re selling,” Terhune says.
Among the next orders of business is determining how quickly you’ll see a return on your investment. This can be figured when calculating the route’s profit potential.
Assess the amount of maintenance required by the backyard environments and pool amenities such as automatic cleaners.
Plus, you’ll need to ensure the route is convenient. With gas prices near record highs, logistics are crucial.
A company that must foot insurance, advertising and fuel costs cannot adequately support a route that charges customers $80 per month, says Terhune of his area.
“The numbers just don’t make sense,” he says. “All you do is cheat the customer — short them on chemicals and … go every other week.”
“Recasting,” or number fudging, is another concern, he adds, which is why it’s important to gather as much information as possible on the accounts you’re buying. Request customer bills and company tax returns to ensure the route is as-advertised.
Business costs also should be among your foremost concerns.
However, technicians may fail to consider all expenses when buying on the basis of gross revenue. While major costs, such as chemicals and employee payrolls, are obvious, some service companies ignore the seemingly minor expenses that can quickly add up.
“A lot of guys miss the small stuff,” Terhune says.
It’s hard to forget about gas, but things such as insurance, phone and legal services, if not in the budget, can take a large chunk out of revenues, and quickly reduce profitability on low-rate routes.
Homeowners aren’t always keen on change. So when a route changes hands, there’s a decent chance the client will terminate service.
“If someone sells their company, about 30 percent of your customers are going to drop,” says Jeremy Smith, owner of Tadpole Pool Services in Wylie, Texas.
Terhune agrees, reporting about three in 10 customers dropping off whenever his firm takes on a new route.
But Terhune’s rates often are higher than his competitors’, so his techs are trained to meet with every new client to explain the charges. It’s essentially a sales pitch promising a higher level of service.
Conversely, Morley initially keeps all new customer accounts at their previous rates.
“We typically keep it the same for at least a year to let the customer get comfortable and familiar with our way of running a business,” he explains. “You don’t want to change over and one month later raise [their rate by] $20.”
However, these accounts are earning less, and eventually must be adjusted to justify the buying price.
To combat loss, some sellers offer a three-month guarantee, which states that the buyer is not responsible for accounts dropped by wary customers. Provided the reason wasn’t poor service, the buyer should receive a full refund.
Such guarantees, however, usually accompany higher-priced routes — 10 times (or more) the monthly gross, Morley says.
“When we buy them at a lower percentage than [normal] … it’s an as-is type of thing,” he says.
Benefits, other considerations
Guarantees are an attractive option, especially for service companies lacking major sales and marketing arms.
But there are other benefits geared toward prospective route buyers. A newer tech should find these quite helpful, though more seasoned professionals may balk at the extra cost.
For example, route brokers often arrange on-route training through the actual seller. This allows buyers to accompany a service tech on the route they are purchasing.
What’s more, the buyer should receive paid training after the close of escrow, according to Charles Baird, president of Pool Route Sales in Lake Forest, Calif.
“Make sure the seller agrees to train for a period of time that makes you feel comfortable, and [that] you receive the income during this training period,” Baird says.
While it’s a nice temporary, albeit less profitable, option, many techs simply prefer to take over the route after purchase.
Either way, it’s a good idea for the buyer to maintain a strong relationship with the seller, in case there’s a need for after-sale support for unusual water chemistry issues or equipment problems.
Furthermore, most route brokers will offer a noncompete clause. While it may be considered more of a safeguard than a benefit, this waiver prevents the seller from reclaiming any sold accounts after the sale, usually for two years.
However, when dealing with a familiar face, such waivers usually aren’t necessary.
“There’s a level of trust: You’re definitely selling to one of the other IPSSA guys,” Smith says of transactions within his Independent Pool & Spa Service Association chapter.
Route brokers typically utilize a non- compete clause to ensure the purchase is as-advertised. Baird has seen techs duped into bad buys, where the seller either fudges the financials or absconds with the purchase money.
Route brokers further serve to legitimize each sale and ensure it closes escrow. This is also why they charge more.
Whether dealing with an independent seller or a route broker, one wrinkle in calculating profit involves the equipment. If the accounts generally contain older equipment pads, extra revenue may be available through repairs, upgrades and new-product sales.
“With the quality of the equipment … I can see future money there,” Morley says. “Obviously, there’s more profit in that part [of the business], so you can start reducing the expense of the purchase faster.”