What are the first steps to selling your business through a M&A Firm?
It’s clear that 2015 was a big year for mergers and acquisitions in the LBM industry. From major national brands to small town competitors, we’ve seen enough of the buying and selling trend to indicate that 2016 will be no different.
We’ve also heard from many LBM dealers who have indicated that they may be considering a sale in the future, but aren’t sure where to begin. For those who are considering working with a mergers and acquisitions firm to help facilitate the sale of their business, we sought out the expertise of three leaders in the field: Ron Dillon, Jason Fraler, and John Wagner. We’ve asked them to weigh in on common questions a LBM dealer may have about selling his or her business.
RON DILLON: Formed the Dillon Group in 1990, a mergers and acquisitions firm focused on building materials, construction, distribution and manufacturing industries. www.dillon-ma.com
JASON FRALER: Managing partner of Anchor Peabody, a mergers and acquisitions firm focused exclusively on the LBM industry. LBM Journal columnist. www.anchorpeabody.com
JOHN WAGNER: Managing director at 1st West Mergers and Acquisitions, which offers a specialty practice in the LBM sector. LBM Journal columnist. www.1stwestma.com
Q: What do you look at to determine a LBM dealer’s value?
DILLON: Dollars available for debt service has the largest impact on value. Management team remaining after owners leaves business is also very important. Good records of past five years are very important as well. What are the owner’s goals and how can they be met? Market share of business in marketing area is of limited consideration.
FRALER: If you want to get a feel for the range of which a LBM business might trade, here is how we set client expectations, and how we build credibility for the guidance we plan to give to potential buyers in a sale process:
First we find a base level of valuation for the business by looking at three things in the current market (a snapshot of current market conditions):
1) Valuations of similar, recent transactions in the LBM space.
2) Valuations of similar, publicly-traded businesses.
3) A discounted cash flow analysis of the business/its future prospects.
From there, we discount or put a premium on the business for things like:
• Size, market position, geography
• Quality of the go-forward management team
• Segment of LBM (Lumberyard vs. Roofing & Siding vs. Drywall Distribution vs. Home Centers & Hardware Stores)
• How much EBITDA you make on a % basis, relative to the Company’s peers in its segment.
Finally, we take all of what we’ve learned about the business and apply what we’ve heard from the financial community and strategic buyers on what a LBM dealer might trade for in the current market, based on the above. Keep in mind this exercise is done early, sometimes before we are even hired, and can change due to market conditions when you’re in the middle of a sale process.
WAGNER: The value of a business is influenced by customer quality, the quality of your facilities and equipment, by a proportionate distribution of your sales across a diverse customer base (with no undue concentration in any one or two large customers). Value is also determined by strong leadership that intends to stay around, and ultimately by a formula that calculates the dollar value of your business as a “multiple of EBITDA,” e.g. a multiple of your earnings.