What is the minimum employee count for a service businesses?

April 18, 2021

by a searcher from Northwestern University - Kellogg School of Management in Atlanta, GA, USA

When looking at service businesses (HVAC, plumbing, landscape, tree service, etc.), do folks have a rule of thumb around a minimum employee count? Or split between W2 and 1099 employees? I've seen quite the range in the $2-5M revenue space. I assume with very few employees (<5), you run into the issue of using all of your time to work in vs. on the company, but would appreciate others' thoughts.

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Reply by a searcher
from Northwestern University in Los Gatos, CA, USA

1099 is generally problematic for licensure and insurance reasons. Although this will vary by trade and geography, I'd say you generally want to be at least $100K revenue/employee. The more technical the trade the higher that rev/employee number should be. I don't think generalizing about or making assumptions about working in vs. working on the business based on size of business is a productive classification to even attempt. You really just want to find out what exactly the owner does and how hard it is to replace that activity. You may want to rethink a fair multiple based on this information. For instance, if the owner's labor belongs in COGS, to me that brings the SDE multiple I'm willing to pay down substantially. If the owner's labor belongs in SG&A but can be mostly automated, process improved, and role-defined away, that's preferable.

Reply by a searcher
from Keene State College in Norwalk, CT, USA

You need to assess the day-to-day of the owner, and supervisors. If there is a manager on payroll then that should answer your question right there. Most of the time, supervisors are team leads and not typically in charge of multiple crews or departments. I think the actual count of employees matters less than the structure. But in my experience with small landscaping businesses, managers start to enter the scene with over 4 crews (of###-###-#### Can't speak on HVAC, plumbing. It's ultimately up to the owner and what they want to spend their time on. I know a guy who has well over 50 employees and no general manager/ operating officer.

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