Why now is a good time to consider selling your business.
It’s hard not to use clichés to describe how good today’s business environment is for companies wishing to sell their lumberyards, distribution centers, or building material companies. But truly, the stars are aligned now in a way that is rare (especially given the cyclical nature of our industry), and – more importantly – it’s not going to last forever. It may not even last 12 to 18 more months. Couple this information with how long it can take to get prepared to sell and get a deal done – typically eight (8) to twelve (12) months in the best case scenario, and we’re looking at a very short window of opportunity.
Are we the only M&A advisors who think this? No. It’s evident to anyone who closely watches the industry. Look to the owners of the largest LBM dealers: ProBuild is selling to Builders First Source and US LBM is for sale after a long series of purchases. Both sellers are owned by sophisticated, institutional investors. These groups understand how windows open and close; they’re choosing to take advantage of it.
Why The Timing is Right: 4 Reasons
What makes the business environment so advantageous to buying and selling LBM companies?
1. There’s money available and a lot of it. This hasn’t been the case for almost a decade. Private equity firms with dry powder see investments with exposure to the housing recovery as a logical buy low, sell high opportunity. Industry firms are getting healthier, and balance sheets are improving. Debt capital is also readily available and very inexpensive – with interest rates at or near historic lows. As interest rates rise – and they will surely rise in the future –that will put a damper on a buyers appetite for a deal. Even a 1% increase in rates adds up to real money when someone is borrowing millions for an acquisition. Buyers who are flush with cash create demand for deals.
2. Timing. We are at that sweet spot with 5 years of good historical growth and forecasters thinking that the housing market should have a few more years of good run ahead of it. Once we are at or near the peak of the housing market, buyers will dwindle in numbers and hence reduce demand for LBM businesses. Buyers want to acquire LBM companies with some “runway”, so they can take advantage of the upside in housing activity as the new owners. As the expression goes, “you’ve gotta leave some juice in the orange” for the new owner. Right now, there is plenty of juice left with a couple of years or so of housing tailwinds before having to deal with potentially softer markets. Buyers who are flush with cash, who feel the timing is right, equals demand for deals.
3. Demand. While M&A activity has been robust, there’s still less sellers than buyers. High demand for deals with low supply has resulted in a period of high valuations relative to historic norms. As an example, businesses sometimes sell for a “multiple” of EBITDA (earnings before interest, taxes, depreciation and amortization). So, if your company has $20 million of EBITDA, today’s M&A environment may allow you to achieve a factor of 6x on those earnings, making your company worth $120 million whereas historically – your company may have only garnered 5x or $100 million. Think about it: let’s say the same company decides to wait it out and sell in two years. Company EBITDA has grown to $24, but multiples have also come down to 5x. This hypothetical company put in two years more of work (and risk), growing earnings by 10% per year, only to get the same amount of money in a sale.
4. Opportunism. We need to consider who long it will be before the stars align again as they are aligned today. The last time we had a very favorable market for M&A activity was before the housing recession, seven or eight years ago. It’s no secret that owners of many LBM companies are up in age. It could be in the 2020s before we see another window of opportunity come again.
Finally, trying to time the market by waiting is a fool’s errand. In 2007 and 2008, there were scores of dealers who had offer letters rescinded when the housing market started to turn sour. These sellers had waited too long, trying to time the crest of the market, only to be left empty handed.
Strike while the iron is hot…and it’s white hot right now.
This article originally ran in the June 2015 issue of LBM Journal.