How Did Madden Elevator Position Themselves to Sell Above Market Value?

This question has been asked of me many times by a variety of successful elevator business entrepreneurs. Our elevator market is hot, PE firms are aggressively entering and providing highly compelling offers. The key is to be organized, structured, and prepared for not “if”, but “when” you get approached to sell your independent elevator company.  

As cities grow and more buildings go up, the demand for elevators skyrockets, creating a golden opportunity for independent businesses. PE firms see the elevator industry as a goldmine, thanks to the steady income from long-term service contracts. This article explores what makes the elevator business so attractive to investors and how market positioning can play a crucial role when it’s time to sell.

What Makes the Elevator Business So Profitable? 

The elevator industry is a sector that’s predictable, simple, and consistently profitable. As urban areas expand, the need for elevators and escalators only increases, leading to more business opportunities. The market is dominated by a few big players, but independent companies can still secure a strong and profitable foothold. 

Here’s why the elevator business is a hot ticket: 

• Long-Term Demand: Urbanization drives the ongoing need for elevators, ensuring sustained demand. 

• Recurring Revenue: Maintenance, repairs, and upgrades offer a steady income stream. 

• Market Stability: The industry’s structure ensures less competition and stronger margins. 

The Elevator Lifecycle: A Steady Stream of Income 

It all starts with installation, but the real money is in service contracts. After the initial warranty period, building owners need to keep their elevators in top shape, and many choose to stick with the original provider due to trust and expertise. This is where the service phase becomes incredibly lucrative. 

Service contracts—covering maintenance, repairs, and modernization—are where the profit really kicks in, with margins as high as 40%. These contracts not only provide reliable income but also make the business more attractive when it’s time to sell. 

Understanding the Vertical Transportation Segments 

The elevator business typically revolves around three main segments: maintenance, repair, and modernization. Each of these plays a vital role in the overall business model and can be a major selling point for potential buyers. 

1. Maintenance 

• Regular Service Visits: Technicians perform regular evaluations (monthly to quarterly) to ensure the elevator’s operation is up to code and ready for inspections. Regular maintenance reduces downtime, callbacks, and costly repairs. 

• Cost Efficiency: Scheduled maintenance lowers overall ownership costs and minimizes unexpected repairs, helping building owners avoid fines and disruptions. 

2. Repairs 

• Ad Hoc Repairs: These are emergency repairs or fixes to address immediate safety issues. Regular safety tests ensure elevators comply with the latest regulations. 

• Expense Management: While maintenance costs are relatively low, the costs associated with out-of-service elevators are high. Regular repairs help minimize these disruptions. 

3. Modernization 

• Upgrades: Typically undertaken 15-25 years after installation, modernization involves significant retrofitting or replacement of systems, reducing breakdowns and repair costs. 

• Regulatory Compliance: Updates to regulations, like the ASME A17.1 guideline, drive modernization efforts, which help building owners avoid downtime and ensure better access to parts. 

Note: Modernization is particularly important as it reduces the likelihood of emergency repairs and minimizes downtime associated with aging equipment. As elevators age, sourcing replacement parts becomes difficult, making modernization a strategic investment that can significantly reduce long-term costs.

Competitive Dynamics in Vertical Transportation Services 

The market for vertical transportation services is highly fragmented, comprising two main categories of providers: Original Equipment Manufacturers (OEMs) and Independent Service Providers (ISPs). Each has distinct advantages, impacting investment decisions.

OEMs: These companies dominate the elevator service market, leveraging their extensive resources and global reach. 

ISPs: Independent providers, while smaller, offer several advantages: 

• Speed of Service: ISPs often respond faster to unexpected repairs due to their local presence. 

• Customer Service: ISPs typically offer more personalized and consistent service. 

• Price Advantage: ISPs generally offer lower prices than OEMs, making them attractive to property managers. Some ISPs are non-union, allowing for even lower service contract pricing. 

• Flexibility with Parts: ISPs can install non-proprietary parts, giving property managers more flexibility in choosing future service providers and avoiding long-term commitments to a specific OEM.

Managing Elevator Business Investments in a Changing Landscape 

The elevator industry offers a lot of strengths, but there are challenges too. It’s important to stay aware of potential issues, like the risk of overcharging for maintenance services or the impact of new technologies like IoT. These advancements can both challenge and enhance business, depending on how one adapts. 

Advancements in IoT (Internet of Things) technology are likely to impact the service market. These technologies enable predictive maintenance, which can reduce the need for costly emergency repairs and increase elevator uptime. While this might lower the number of service visits, it could also make building owners more reliant on specific vendors, increasing contract retention. 

Some new emerging technologies are changing the way “remote monitoring” is being utilized. Intelevator is a concept utilizing IoT to augment elevator service instead of predicting. Information gathered from IoT, surveys, and mechanics coupled with well thought out algorithms provide mechanics with pertinent information that helps them focus in key area proactively solving maintenance challenges before they become a problem.  

Seizing Opportunities in Elevator Investment Management 

The elevator industry presents a solid opportunity for those managing investments, particularly in the service market. The three key segments—maintenance, repair, and modernization—offer diverse revenue streams that contribute to the industry’s stability and growth. While growth in new installations may be modest, the service market is expected to outpace it over the next 5-10 years, driven by organic growth and strategic acquisitions. For investment managers seeking a stable, high-yield option, the elevator industry is being considered, especially when focusing on companies that can maintain or expand their market share in this evolving landscape. 

Independent Elevator Businesses should structure their businesses in preparation of acquisition, even if there is no intent to sell anytime soon. The process of setting your company up for purchase can be an eye-opening experience that can also help you organize and structure your business for growth.