After
a highly active 2023, deal activity in the roofing space continues at a
rapid pace with no signs of slowing. Despite high interest rates,
inflation and economic uncertainty hampering deal-making activity in
most of the building products market, investors continue to aggressively
chase roofing contractors for deals, attracted by the robust demand
outlook, size of the market, and benefits of scale.

These
investors can offer a variety of solutions and partnerships for
independent operators and provide capital and expertise to assist
management teams in achieving their goals. At the same time, many
private owners are considering a transaction as valuations are
attractive, and the pool of competitive buyers has risen significantly,
leading to historic deal activity.

Steady Pace 

The M&A market for residential reroofers is as strong as it has ever been, and the window is wide open for potential sellers. If you’re considering a transaction, now is the time to get serious and begin thinking about kicking off a process.

Consolidation
continues at a robust rate, with more investors entering the market
every day. Institutional capital providers (i.e., private equity funds
and family offices) have a lot of money to put to work, and record
numbers have been targeting the roofing industry.

Residential
reroofing businesses have attracted the most attention as investors like
the self-pay nature of the business model, the lack of weather-driven
volatility, and the ability to scale and beef up marketing functions
with investments in digital/social marketing, KPI tracking, and CRM
systems.

On the new construction front, this market saw a
shot-in-the-arm deal with Monomoy Capital Partners’ acquisition of
Southern Exteriors in May. The goal is to build a regionally and
potentially nationally scaled turnkey siding and roofing solutions
provider serving the builder market. It seems the worst of the new
single-family construction woes that plagued the market may be behind
us.

Insurance Pays 

The insurance pay market faces structural challenges but also opportunities. Contractors
serving the residential restoration/insurance pay market have struggled
with stricter claims adjustments and rising deductibles for homeowners.
Some operators are pivoting towards more retail and commercial business
to offset the challenges here, while others, like hail belt specialist
Apple Roofing (owned by Gauge Capital), are choosing to double down and
specialize in this market.

Providers who have or develop
specialized capabilities in this market (close relationships with
insurers, streamlined claims processing abilities, and in-house or
third-party consumer financing) will do well as others exit or
de-emphasize this market in response to challenges.

Commercial Capital

The
commercial roofing market remains strong but is end-market dependent.
Commercial roofing contractors, especially those operating in the highly
attractive reroof and maintenance side of the business, continue to see
growth and outperform expectations. Attractive markets include
healthcare, industrial and commercial distribution facilities, and data
centers. The SLED market (state, local and educational) remains strong,
though there can be working capital issues here, as municipalities are
slow to process payments. Another encouraging trend is that commercial
insurers in specific markets (e.g., Florida) are insisting on a more
rapid replacement cycle to provide coverage, spurring demand for many
weather-prone markets.

There remain many aggressive, active
buyers in the commercial space looking to acquire new business,
including Tecta America (owned by Altas Partners), Nation’s Roof (backed
by Acacia Partners), CORE Roofing Systems (Shoreline), and PAX Services
Group (New State Capital Partners).

Important trends to track
include material shifts and the consumer buying process. Consumers in
both residential and commercial markets are emphasizing durability and
useful life more and less on aesthetics as they look to minimize
lifetime costs. This includes a shift to metal roofing, synthetic
materials, and solar.

While homeowners continue to cite
word-of-mouth/recommendation as the most frequent channel through which
they find a contractor, the share of consumers starting their buying
journey online (search engine, social media, home services websites)
continues to grow. This channel will become ever more important as
younger generations age into homeownership.

Buyers Market?

Buyers
are well-capitalized and aggressively looking for growth. After last
year’s decline in housing, the industry appears to be entering the
expansion part of the cycle, and any future interest rate relief will
only contribute to the speed and size of the recovery. Many consumers
have put off maintenance spending (especially relevant to contractors
with meaningful siding exposure), and this pent-up demand will begin to
materialize this year and next.

Buyers in the new construction
space are focused on turnkey solutions, doing for exteriors contractors
what names like Interior Logic Group did for interiors. Overall, we
expect investors to continue to be aggressive in sales processes,
pushing valuations up.

What should potential sellers think about
in this market? The M&A market for residential reroofers is as
strong as it has ever been, and the window is wide open for potential
sellers. If you’re considering a transaction, now is the time to get
serious and begin thinking about kicking off a process.

The story
is similar for commercial maintenance/reroofers as there are more
well-capitalized aggressive acquirers than at any time in recent memory.

Near-term sellers should begin evaluating their readiness,
including the strength of the management team (sales, operations,
finance), the credibility of reported financials (audits/reviews,
internal controls, speed and regularity of month and quarter closes),
and their own goals for a transaction (value, timing, impact on
employees, legacy, etc.).

If your timeline is longer than the next
several months, potential sellers should focus on things that will
drive value and certainty of close. This includes 1) Customer and
end-market diversification if the current business is highly
concentrated in one market; 2) Strengthening the organization and back
office and ensuring the business has a strong team of leaders in sales,
finance, accounting and marketing, and; 3) Considering deployment of
software and systems that can help across the business in both marketing
and operations (e.g., CRM systems, job tracking, KPI monitoring, etc.).

Preparation is Paramount

In
the industry, completing a private sale takes approximately six months
from start to finish, but at Anchor Peabody, our work often starts much
earlier. The more preparation time, the better the outcome.
Understanding the company strategy, the management team and bench, the
strength of the finance and accounting team, and the growth plan and its
defensibility are all key to achieving a successful transaction. We
work with potential sellers for months and sometimes years before they
ultimately plan to go to market.