The
roofing contractors who become our exit planning customers often ask,
“Should I consider an outside sale of my company?” And my response is
always the same: “It depends on your personal, business, legacy, and
financial goals.” The answer is complicated but as simple as aligning
your goals.
In November 2023’s RC eMagazine, I wrote a
piece titled “Your Sale Options in a ‘Roofing Exit”; check it out for a
birds-eye view of your selling options. This column is devoted to an
overview of an outside sale to a competitor or private equity, what
companies make attractive targets, the overall marketplace, and the
sales process.
Many owners receive weekly calls from private
equity, or PE, firms or their representatives interested in buying
commercial or residential roofing companies. Still, before you sign any
agreements or provide financial information — only to find yourself
negotiating with one limited opportunity — take a beat; do not sign
anything yet.
My immediate advice is to take a deep breath and
strategically consider your goals. Then, if you want to sell, find a
professional to represent your company and go to the market to attract
multiple buyers, higher offers, and the most attractive suitor.
The Buyers
Roofing
consolidators have been in the market for more than 20 years, and now
we have regional roofing companies and PE active in the marketplace.
Why? They see an attractive, profitable, fragmented, stable market —
ripe for longer-term growth investors.
The consolidation
attraction is an opportunity to provide an economy of scale and
synergies for purchasing shared resources, best practices, and
bargaining power to be more competitive.
PE noticed during
COVID-19 that the demand for roof maintenance, repair, and replacement
continued. Roofing contractors are attractive to PE. Why? Simply, most
money on roofing is spent within the repair and replacement space,
approximately 80%, and not on new construction, which makes up the
balance. That translates to reoccurring revenues, even during a
recession.
Ideal Target Companies
PE
companies are “financial buyers,” investors who build value and sell
later at a higher price. As investors and not contractors, private
equity invests and purchases controlling interest, usually 60%-70%, and
often needs owners to remain and manage the company to increase value.
These
owners can later sell their remaining portion for a “second bite of the
apple” and a more significant multiple and be wholly cashed out. Every
company’s unique culture and attributes will reveal its salability and
value.
Here are some attributes of ideal target companies:
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Profitable, sustainable earnings that determine the best-of-class contractors.
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Good margins (10%+ EBITDA)
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Pattern of growth and strong EBITDA in the trailing 12 months up to the purchase date.
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Clean and, preferably, audited financial statements.
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Free of potential liability.
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Seasoned professional management with retention bonuses.
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In-place performing management systems such as an EOS (Entrepreneurial Operating System).
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Recurring revenues from solid maintenance, repair, and roof replacement programs.
Getting Your ‘House’ in Order
The
sales process typically takes between eight and 12 months, but before
then, it is a wise move to make sure your ducks are in a row. In other
words, make sure your accounting is transparent, your receivables are in
order, and your expenses are clearly defined.
Messy books
require more work to parse, which often means more due diligence from a
prospective buyer. That increased due diligence can have a negative
impact on the valuation of your company. You wouldn’t sell your home or
car without making sure each is clean. The same goes for your
contracting firm.
Here are a few points to keep in mind:
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Clean up every aspect of the business to make it “sale-ready.”
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Complete a company valuation, tax strategy, after-tax value, and minimal sales price floor.
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Create an Offering Memorandum and go to market.
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Narrow
down offers through LOI (Letter of Intent) and then initiate
negotiations with the chosen buyer — the percentage of ownership, future
owner involvement, etc. -
Complete the buyer’s due diligence to finalize the purchase and sale agreement.
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Sales closing and new ownership.
-
The
owner loses financial and strategic control at the sale but has
operational influence and holds the remaining stock value for the next
sale.
Before the COVID-19 pandemic, most roofing exits
were management buyouts. This exit is still popular for owners wanting
to sell internally to management and family over eight to 10 years. The
entry of PE has provided more selling opportunities to commercial and
residential contractors who wish to cash out, take some chips off the
table, and move into retirement.
Remember, cashing out will be the
largest financial transaction of your lifetime. Do not react to a
buyer, but instead, have a strategic financial plan to align your
personal, business, and financial life. Attract multiple buyers and a
plan to reduce or eliminate exit taxes — that can easily exceed 55%.