One of the primary reasons the owners of an LBM business decide to sell their company is that they’re ready to retire.
The sale of their business affords them the opportunity—and the financial liquidity—needed to enjoy a work-free lifestyle. But there are plenty of other reasons to sell an LBM business, even if the selling owner intends to continue to work at the company after the transaction.
For a company that has stuck to selling products in the past, gaining access to a competitor’s superior installation capabilities, for example, can result in additional sales and happier customers.
There are a number of financial benefits to being acquired. Generally, the buyer of an LBM business is either a larger competitor or a private equity fund. In either case, they are likely to have better access to and a lower cost of capital than the seller. For a selling company whose growth has been constrained in the past by capital availability, such financing can be a boon.
Owners that lack the capital to grow feel that they are driving with one foot on the brake and the other on the gas. Nothing is more frustrating than losing business opportunities because a lack of capital is forcing lead times to be longer than optimal.
Another advantage of joining a larger organization is access to high caliber management talent, who may have spent time leading the largest companies in the industry. When a company is acquired by a larger competitor, there is almost always a fruitful exchange of best practices.
In some cases, the acquired company can benefit from the stronger brand recognition of the larger acquiring company. Often though, the brand of a local chain is so strong that the buyer chooses to leave the acquired brand alone or co-brand it with the buyer’s brand.
A key benefit that nearly always occurs with a sale is receiving better pricing on materials as a result of combining purchasing power with a larger acquirer. In some cases, the buyer may also have in place distributor arrangements that are exclusive or difficult to qualify for. This can provide the acquired company with access to an attractive and lucrative product line that they could not have otherwise obtained.
A final benefit of being acquired by a larger company is geared toward a selling owner that decides to roll a portion of their equity into the buyer, or chooses to keep a portion of their shares in anticipation of new buyer selling at some point down the road.
Since the buying company is probably larger and more successful, they will likely be valued at a higher EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) multiple than the seller. Thus, the retained portion of the seller’s shares will be valued at a higher amount. Combining all of these benefits of selling with the favorable M&A environment, sales of LBM business are likely to be brisk for some time.