Along with improvements in the housing market and the LBM industry, we’ve seen an accompanying uptick in mergers and acquisitions (M&A) activity. This increased acquisition appetite is welcome, particularly among business owners whose retirement plans were delayed by the downturn.
For owners looking to sell their business, the challenge becomes finding the ideal buyer. For most, this is a once- or maybe twice-in-a-lifetime decision and certainlyone of the largest financial decisions they will ever make.
In our more than a dozen years in the building products M&A industry, we’ve encountered only one owner who claimed not to care about what happened to his company after it was sold. But for the other 99% of owners, this decision is a deeply personal and important one.
Most owners would agree that the right buyer for their company is an organization that will maintain the owner’s legacy and grow the business. For this reason, sellers want the buyer to be well positioned for future success. This includes having a strong knowledge of the LBM industry.
It is also critical to select a buyer whose overall culture and individual executive personalities mesh with those of the selling owner. This makes it much more likely that the new owner will continue to manage the company with the same values it has had inthe past.
Owners should avoid buyers who attemptto use too much debt leverage in making their acquisitions. Such leverage will increase buyer returns in good years but may lead to bankruptcy in lean times. Other less-than-ideal candidates include those with too short a hold period for their acquisitions. Buyers who expect to flip a business in just two or three years may focus primarily on short-term profits and cost cutting, rather than the long-term health of the business.
If sellers are worried about employees keeping their jobs post-sale, they should seek a buyer who doesn’t have a financial incentive to close existing locations. These include private equity funds with no existing LBM company in their portfolio or other LBM distributors whose geographic coverage area doesn’t overlap with the selling company’s territory. Such buyers are seeking geographic expansion and will likely keep all locations, unless they are chronically unprofitable.
Even the ideal buyer for a company may divest it in the future. In that transaction, the original seller will have no say regarding the next buyer. Fortunately, the invisible hand of the market will likely align future buyers’ interests with those of the original owners—to continue to grow the company, provide advancement opportunities to employees, and remain highly profitable. —Michael Collins is a partner with Building Industry Advisors. He leads the firm’s efforts in M&A, capital placement, and acquisition advisory services for building products distributors and manufacturers. Contact him at firstname.lastname@example.org or 312.854.8036.