Episode 37: Billion Dollar M&A Advice For The Trades

In the trades industry, mergers and acquisitions, or M&A, have always played a part in growth and success for companies. However, the M&A world is becoming increasingly important to understand for contractors, either for growth today or to ensure you’re working towards the best exit strategy possible down the line. Fred Silberstein, President of SF&P Advisors and Brian Cohen, Business Strategist for SF&P Advisors, share insight and wisdom that comes from years of experience and over a billion dollars in revenue as a result of almost 300 deals.

Increasing M&A Interest in the Trades

Over the last 5 years, there has been an increasing amount of interest and private equity (PE) flowing into the trades industry. With a lot of fragmentation, the ability to scale, current market dynamics, and the fact that trades are essential services, multiples for contractors keep going up and up. That means better outcomes for sellers right now, and a bright future worth working towards.

SF&P Advisors talks to PE groups all the time. Normally, these companies see around two or three thousand potential companies to acquire on a monthly basis. They flip through the proposals, and select a handful of them to pursue. In 2020, for obvious reasons, things have slowed down and that number has dropped by over 80%. Restaurants and other non-essential businesses aren’t a great investment, but trade companies deemed essential certainly are. PE groups have money that needs to be invested, and our industry is gaining momentum as a hot ticket item. As more and more buyers come to the table for deals, multiples keep going up.

Advice for Contractors

What all this means for contractors is that it’s a great time to learn more about mergers, acquisitions, and strategic partnerships. Whether your exit strategy is to retire early or build an extremely valuable business to sell or pass on to your children one day, it’s never too soon to plan for the future. Fred and Brian talk to everyone regardless of the size of your company, and are happy to offer advice and suggestions. From 2-5 year plans for contractors just starting out that want to make changes to head in the right direction to seasoned vets with complex questions, there’s plenty to learn from the SF&P team.

So, what’s important to understand when it comes to M&A?

Risk Profile

In acquiring a company, you’re obviously taking on risk. Partnerships can reduce that risk, but every acquisition, according to Brian, should be a 1+1=something greater than 2 equation. In other words, an acquisition should earn a result greater than the sum of the acquisition and original business. Understanding your risk profile, or how much risk you can or should take on allows you to leverage your position and figure out the best way to invest your capital. Some companies might find success looking into M&A, while others would probably be better served investing into marketing or other areas to grow their current business.

EBITDA

Your EBITDA multiple is something worth knowing no matter what stage of business you’re at. EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization, is how your multiple is calculated when selling. It’s a way to determine the current value of your company, if you were to sell. It’s all too common that an owner wants to sell, and realizes too late that fixing a few smaller problems would have led to a much higher EBITDA.

If you’re wanting to grow and put some deals together, you have to understand what your business is worth. Oftentimes, that will change the direction you want to go in, and according to Brian and Fred, they see that happen almost every time they get on a call.

Raising Value in Your Company

If you’re a contractor, what are some of the things that either help a deal close or raise the value of your company?

Numbers in order

If your books and accounting aren’t in order, things are going to fall flat. Your accounting, KPIs, P&L reports, and financials all need to be in order. This all goes back to having a great leadership team, and ensuring you have the right people keeping track of your numbers.

Software, Service Contracts

There are certain things that a buyer loves to see in a company. Service contracts are great, of course, because it means an ongoing relationship with more or less guaranteed cash flow. Another bonus is an integrated and correctly utilized field management software (FMS). Service Titan is a premier FMS that many companies in the trades use right now, allowing for real-time data tracking and reporting. It makes the process easier for the buyer, and having a FMS is great for your business whether or not you’re actively involved in the M&A world.

Accounting

You have to have your numbers and your number people in order! When a buyer wants to see your numbers, they don’t want to wait two weeks. You’d be surprised how many large businesses don’t have a CFO. Your P&L reports, KPIs, and other financial information should be easily and readily available to review at all times. You also need to know what Brian calls your “bench strength”. Your bench strength is how long you can leave the business and have it continue to move in the direction you want it to. Is that a never? A week? Two weeks? The longer you can leave it means that you’re running your business and your business isn’t running you, and that you have the right leadership in place.

Strategic Partnerships

If you’re interested in becoming active in the M&A space, you can’t go at it alone. You have to count on people that have done it before. You have to find the right partners, and if nothing else, contact the pros and ask for advice. You need to know your exit strategy, and if you’re considering it at all, you gotta get your stuff together!

To learn more about SF&P Advisors, to get an idea of what your business is worth, or to figure out some next steps to raise the value of your business, you can reach out to Brain via email, or call or text him at 954-226-3409.