South Florida M&A Advisors Podcast
We are a team of highly experienced M&A advisors who specialize in offering bulge bracket like deal advisory services to lower middle-market companies across the United States and globally. Our team of experts have a deep understanding of the M&A process and a proven track record of successfully navigating complex transactions. Our focus is on delivering personalized, tailored solutions to meet the unique needs of each of our clients. Whether you are looking to buy or sell a business, or seeking guidance on a strategic financial decision, we have the expertise to help you achieve your goals.
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contact (954) 646-7651
email: rcohen@southflorida,ma.com
South Florida M&A Advisors Podcast
EP #9: Unlocking Success in Roofing M&A: Strategic Acquisitions and Smooth Transitions
Unlock the secrets of roofing industry acquisitions with the South Florida M&A Advisors Podcast! Ever wondered why larger companies are snapping up smaller, locally recognized roofing firms like Earl Johnston Roofing? Join our host, Russell Cohen, as he explores the strategic mindset of add-on acquisitions. We delve into the personal motivations behind such sales, including the seller's health considerations and the perfect timing for transitioning business ownership. Learn how maintaining a brand's local identity can be a game-changer in achieving economies of scale and ensuring a smooth leadership transition.
Gain valuable insights into the complex world of valuing and selling a roofing company in Florida. This episode sheds light on the seller's decision to prioritize immediate cash over potentially lucrative earnouts and seller financing, with the aim of securing a swift exit. We highlight the crucial role of having expert legal and professional support in place, alongside the lessons learned about the importance of patience and experienced advisement. Don't miss this opportunity to expand your understanding of successful M&A strategies in this dynamic sector.
Welcome to the South Florida M&A Advisors Podcast, your trusted M&A team. Here's your host, Russell Cohen.
Speaker 2:Hi everyone and welcome back to the South Florida M&A Advisors Podcast. You know, russell, you're becoming somewhat of an aficionado in the sales of roofing companies, specifically because going back a few months ago you sold I think it was $100 million roofing company up in Palm Beach, I believe it was and now, most recently, you just did another roofing company $6.5 million deal. So I thought we'd dig into that and talk a little bit about the process and the experience. So, first of all, congratulations, thank you.
Speaker 3:Good news. You know, 10, 15 years ago, I didn't expect to, as roofing started to become a vertical in my business, and I'm not really trying to make it a vertical. It just so happens that these last two assignments are roofing, happens and that these last two assignments are roofing, and now.
Speaker 2:Now I'm like, okay, well, let's start working with contractors more often, because there's a big demand for it. So why not? Absolutely? So what? What made this roofing company an attractive, an attractive acquisition? Talk a little bit about the deal and then we'll kind of go from there Talk a little bit about the deal and then we'll kind of go from there.
Speaker 3:Sure, so it wasn't as large as the first roofing company that we did in May. This is what is called an add-on acquisition. So the company that acquired Earl Johnston Roofing was Dunes Point Capital. They have made multiple investments. They made their platform, their first move into the space, with another company at a higher multiple, just like we did with the larger roofing company. And then what ends up happening is they start acquiring smaller roofing companies for economies of scale because they got their large platform investment and now they go around, they're buying companies in florida. Basically, at this point they they bought one in Orlando, they got one in Hollywood.
Speaker 3:So, as they find the right investments, they will do add-on acquisitions and typically the add-on acquisitions are they typically range from 1.5 million EBITDA and probably can go, you know 2, 3, 4, 5 million and those are your add-on acquisitions. And when a company is making, you know, 10, 7 to 10, 15 million even, that's your platform acquisition. That's the first entry of the private equity group into the space with bigger multiples, but this was an add-on acquisition at a lower multiple that we sold the larger roofing company. Equally as important, still as challenging as ever, different issues, but we were able to get to the closing table eight months after the LOI.
Speaker 2:So I know you were representing the seller in this transaction. Obviously, right, correct. I did have the engagement. So I'm curious, though, on the other side, on the buyer side, when this company is acquiring these smaller roofing companies now, are they bringing them into the fold of their brand, or did they then continue operating these companies under the previous branding of the other company? How does that typically work? Companies under the previous branding of the other company how does that typically work?
Speaker 3:They they are keeping the name the same, they run them independently under under corporations, but they they have a mother company and they they put the roofing company under it. So so yeah, they're not rebranding because you, you just bought a company that's been in the industry for 40 years, you know has a recognition of of the name, especially with this particular seller, very strong brand recognition in Broward County of high integrity, you know, great performance and work, deliver. You know old time Florida business owner. So it would behoove the private equity group to start making major changes, especially to the, you know, to the name of the company.
Speaker 2:Yeah, it makes sense. I've heard of that company before Earl Johnson. Is it Earl Johnston or Johnson? Yeah.
Speaker 3:Earl Johnston Roofing. There's no.
Speaker 2:E at the end.
Speaker 3:There's no E at the end.
Speaker 2:So in this particular case because I know you deal with a lot of businesses that build the business up and then they get into their close to retirement years and then they negotiate these types of deals In this particular case, what was the deal with the seller? How did they decide it was the right time to sell for them? Talk a little bit about how they led up to this decision to ultimately sell the business.
Speaker 3:Seller was in his mid-60s, yeah, uh, and he started having development health issues nothing life-threatening, but to the point where you don't want to be on the roof. Yeah, you know, you know being, you know those go out on jobs and gets involved. He's not laying the shing, he lets the subcontractors do that. But you know so there has to be an exit. And you know, and they say if you sell your business past 70, time is not that important to you, you are the business and you become the legend in your own business. So the perfect right time in his mid-60s, because you've got to transition one to two years. In his case, he agreed to stay on for one year, which is a very rare circumstance that private equity lets an owner get out within one year. Normally it's a two-year contract and if you're trying to, if you're trying to buy time, your multiple will suffer because it gets risky when the owner leaves. So he did get a one-year contract and he will exit one year, probably next November 1st of 25.
Speaker 2:There's got to be a lot of intricate knowledge within the mind of an owner of a business, for I don't know know how many, how many years, probably decades he owned the business and built the business. Um, so yeah, there's a lot in there that the new ownership would need to access. You would think, yeah, you got.
Speaker 3:You got to find someone within the company has to step up or they have to go outside and have someone fill the shoes of that owner who you know is the name on the company, is the person. So, yeah, very challenging. But in this scenario, you know, roofing companies are very thought after now because it's in a roll up phase. So this private equity felt they got, they paid a good price, but also they, you know they didn't want to lose the opportunity. No, doubt.
Speaker 2:So after a year, once he's out, do they still typically communicate with him after the fact? Like, like, is he? Is he out after that, or Is there something in the contract? That allows access to him to some degree in the case of issues A lot of times the owners don't completely withdraw from the business.
Speaker 3:They might, you know, might be on a consultant basis. They might go into sales, they might take a break and then come back because they, you know, they missed the action and they don't want to keep their mind out.
Speaker 2:What am I going to do with my life now? Right, in this case, you know, I think, the action, and they don't want to keep their mind out. What am I going?
Speaker 3:to do with my life now. Right, in this case, you know, I think he'll make a clean break, but will also offer you know if they run into issues, he'll I'm sure he'll be a great, great person, like he always is. He'll help them and help try to solve some problems. You know.
Speaker 2:So you mentioned eight months start to finish for this deal. Essentially, Were there any unique challenges? I'm sure that things came up over the eight months. What were some of the unique challenges that you faced while negotiating this deal?
Speaker 3:Yeah. So one of the very unique challenges Seller was a C-corp when he started the company and he converted to an S Corp and there is a five year trail that you can't sell your business or you'll have a taxation, double taxation. So when you convert from a C to an S Corp and you sell within that five years you're going to get taxed at corporate tax and then capital gain. So double taxation, that's no fun. That's no fun, especially for a seller. They're counting every dollar. So the deal was scheduled to close in May.
Speaker 3:We ran into some issues with the attorney as the attorney's house was declining along the way in the transaction and so it got really slow. And then we end up you know people, people going out of town, people are traveling, this thing got delayed and we were going to try to close after he was past the five years uh, which then became September, um, and the deal got slowed down. Because they own the property. We had issues with the private equity group give a security deposit or not. We ran into a lot of other issues and the attorneys just weren't ready with the contract negotiating the contractyear employment agreement that exceeded the deal that we sold in the year prior. So a company that was 10 times smaller got paid a higher salary than the CEO that sold a very large roofing company. It was incredible. They wanted the business that badly yeah sounds like it.
Speaker 2:What were some of the key factors that led to the success of this deal?
Speaker 3:Well, you had a motivated buyer that wanted the company. They were focused, even though they felt that the seller was challenging because he was unaware of the of the m a process. If you're really under, this is the first time, and probably last time, you ever go through it, so it's you know. You, the seller decided to take a very slow process to understand it. It wasn't a rush to the closing uh, motivated, a motivated uh buyer that wanted the company. Timing in the seller's life was correct, even though you know he kept saying I can get more, I can get more.
Speaker 3:But I didn't think they wanted to go through the whole process because you know Earl and his wife who are owners of the company. You know Earl and his wife who are owners of the company. The process is so draining and they uncover everything to the minutiae in the quality of earnings and in the due diligence. I don't think that you know she wanted to go through it again. It's just so tolling on your life because you're running a company at full speed and then you're trying to sell your company and you're trying to find documentation from 20 years ago that you know you never thought you would, ever didn't even know you had. So the legal due diligence you know the accounting and legal is so, so tough on a seller. You just want to get the deal done. You don't want to go through it again.
Speaker 2:You know, it just came to me, russell, where I think I recognize other than seeing trucks go around with Earl Johnson Johnson roofing. I fairly certain that I had him on the Good Neighbor podcast when I first started a year and a half ago. I got to check on that, but I remember doing an episode and it sounds familiar Earl Johnson, so I'm going to look into that. Yeah, I think I've met Earl and, if I recall correctly, he's a really, really, really good guy.
Speaker 3:Yeah, he knows his stuff, he performs very well, he knows the industry and you know, when you're changing your roof, I mean this is your house, this is your largest asset. When you're changing your roof, I mean this is your house, this is your largest asset you want to make sure you have a reputable company that will do the job Right. You know there's warranties on on the on on the roofs, you know. So you, you don't. It's not something you want to try to cheap out on. And he and he's not the cheapest and he's not the most expensive, but he's he's fair, he's honest. He's not the most expensive, but he's fair, he's honest. You know you're getting one of the last remaining good old boys of Florida of tremendous high integrity in the industry. No doubt about it. They don't make people like him anymore.
Speaker 2:What about the valuation process? How did you guys land on the $6.5 million price tag on this deal?
Speaker 3:So the seller was we had about a 2 million EBITDA we were working with and we were getting offers for hire. But it was important for him to exit quicker and so the higher valuations were coming in with earnouts and seller financing, higher rollover equity, and he was trying to get the most cash at closing. So in this scenario, at the $6.5 million price, it was a 94% cash out at closing and a 6% rollover equity, so that was the least riskiest part. He wanted to get a deal where you know he did not want to be working for a new owner and be held to numbers. You know, because he's never really been held to numbers for himself. You know he just worked hard and did numbers. So he didn't believe in earnouts. He didn't believe in seller financing, even though that would have given him a bigger number. He just didn't want to be told by another company that you had to do so much in revenue per year. So he ended up picking the highest down payment with the least risk of money and what was important to him was to be able to exit the business in a year. So if he was able to stick it out for two years, he probably would have gotten more money because two years would have mean more to the private equity. He could have gotten earnouts. He could have gotten just a bigger number.
Speaker 3:So he chose you know, time was important to him to sacrifice a little bit on the price. So we had about 20 offers along the way because we brought it to market in January of 23. And we put it under an LOI February of 24. So there were many, many offers along the way but nothing really changed, nothing really satisfied, until we hit that 94% cash out position. So that's important to these business owners. In reality they'll never cash out 100%. It's always going to be part of a rollover equity. There's going to be earnouts to reach certain price levels. In this scenario it was purely based on how much money I can get to the closing table and not risk my money in the purchase price.
Speaker 2:So important to have a professional such as yourself throughout this process. Obviously, this is a long, drawn out process in most cases and so much goes into it and you bring so much knowledge to the forefront and you really look out for the best interest of your clients and what their goals are. In this particular case, like you said, his goal was to cash heavy on the end of the sale and get out quicker, and you made that happen for him. You've done quite a few of these deals throughout your career. I'm sure that each deal teaches unique lessons, things that you learn. What's one lesson that you drew from this deal that you can share that could help potential other business owners that they can keep in mind, I guess, when they're considering selling their business?
Speaker 3:It took a lot of patience in this deal because we had a lot of things that we did not expect In this scenario. He did not hire a M&A attorney. The attorney got the deal done, okay, but it did take longer than we wanted to, because time is the evil of all deals. The attorney was a probate attorney, but also had his hands in acquisitions. So, but also had his hands in acquisitions. So when you're dealing with a law firm on the other side, that is a true M&A law firm. I felt the other law firm was a little more superior to his law firm because he was more of a one-man company, Okay. So I think it's important that the seller realizes you go to a M&A law firm for representation because the buyer is a professional buyer and they're getting very large law firms that know the M&A process. So that is so important because we probably could have probably could have been finished a couple of months earlier.
Speaker 3:As I mentioned, the the attorney did run into some health issues, Um, and so that kind of um slowed it down. He wasn't great with technology. He got the job done, Uh, I I just had to just, you know, remain calm and let it happen. You know, there was one time that we thought that maybe the seller might switch because the gentleman almost removed himself from the deal. So we got to that point but but he was able to stay in the deal and get it done. But he was able to stay in the deal and get it done. So, yeah, the lesson to be learned is get a M&A law firm, because they're on the other side, is even a bigger law firm on the pie side. So and we worked really well with them. They did a great job. They wanted to get the deal done. They were not impeding the deal, it just took more time. Basically.
Speaker 2:Well, good stuff, russell. Again congrats on the new deal. I'm waiting for the third roofing company. The Trifecta is coming down the pike. I know it's in the works.
Speaker 3:Yeah, we don't have any roofing engagements on the books yet, but we do have a large plumbing contractor, so hopefully in the next six to 12 months we'll be talking about that.
Speaker 2:Perfect Sounds good, brother, always a pleasure and thanks everyone for tuning in and we will catch you all next time on the next episode of the South Florida M&A advisors podcast. Everyone, take care, have a great day.
Speaker 1:Thanks for listening to the South Florida M&A Advisors Podcast. For more information, visit SouthFloridaMAcom or contact 954-646-7651.