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Wriggling out of the Service Business Trap | Built to Sell News

Service companies get a bad rap when they sell. Acquirers figure the assets go up and down the elevator every night so there isn’t much to value.


Of course, acquirers are wrong. Service businesses can be some of the most lucrative, capital-efficient companies on the planet, but when it comes to selling one, your job is to make it look less like a service and more like a product business.


Take John Rood as an example. John started Next Step Test Preparation to help aspiring doctors cram for the MCAT. In the beginning, they offered mostly one-on-one tutoring. John saw Next Step as a wealth creation opportunity so kept a close eye on acquisition multiples in his industry- which ranged from two to four times EBITDA. John wanted to do better, so he invested his profits from tutoring into creating products.


He built a thriving business selling mock exams and asynchronous online courses and content. His EBITDA margins ranged from 20–40%. As he approached $10 million in sales, Next Step was acquired by New Harbor Capital for a substantial premium over the multiples he’d seen other tutoring companies sell for.


Learn how John escaped the service business trap:


Quote of the Week


“We were successful in escaping the service business trap.”

– John Rood describes his reaction to the original LOI to buy Next Step Test Preparation.


Clip of the Week

In this clip, Rood shares practical ways to raise the value of a service-based business.




  • Becnel Rental Tools LLC (Becnel), a privately held company specializing in the rental of tools and equipment, was acquired by Transcat, Inc. (Nasdaq: TRNS), which ensures the accuracy of measuring tools and devices and also rents out testing tools. The purchase price for Becnel was $50 million, paid with $32.5 million in Transcat stock and $17.5 million in cash. In 2023 Becnel’s EBITDA was $5.8 million, valuing the company at over 8 times its EBITDA.


  • Purely Optimal Nutrition, an e-commerce nutraceuticals company operating in North America, has been acquired by Smart for Life, Inc. (Nasdaq: SMFL) for $17 million. Smart for Life, Inc. markets and manufactures nutritional foods and supplements worldwide. Purely Optimal Nutrition’s EBITDA was just over $1 million, suggesting the business was valued at over 16 times its EBITDA.


  • The Hyatt Regency San Antonio Riverwalk, a 630-room hotel located between San Antonio’s Riverwalk and the Alamo, was acquired by Sunstone Hotel Investors, Inc. (NYSE: SHO) for $230 million. The net purchase price values the hotel at approximately $352,000 per key and represents an 11x multiple on the midpoint estimate of the hotel’s 2024 EBITDA.

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