Numbers don’t lie, but in the case of recent M&A activity, they can mislead. We think that’s the case with the scorecard for deals in 2017 that we compiled based on ProSales reporting and my firm’s research. That scorecard suggests 2017 was a down year, with just 34 deals vs. the 51 that occurred in 2016.
Such a slowdown might suggest buyers have less of an appetite these days. But that doesn’t jibe with what we’re hearing. We think there’s another reason why deals aren’t happening, and it’s this: You’re having too much fun.
Making money—particularly after the housing crash we had—can easily make you want to stick around and generate even more revenue rather than prep the company for sale. During the M&A panel and amid the breaks at the ProSales 100 Conference, it was commonplace to hear indications that owners wanted to wait two or three more years before selling. Good times can do that.
Trouble is, the buyers might not feel the same in 2020. And even if they’re still buying at that time, valuations have a tendency to drift downward as we get closer to the economy’s next soft patch.
You can take comfort in knowing that acquisitions continue to be the preferred route of growth in the LBM industry. In 2017, the 34 deals we tracked involved 313 locations. That’s six times as many branches acquired through deals as there were greenfield openings.
Who was buying? In 56% of the deals, it was lumberyards, while another 20% were undertaken by specialty dealers of roofing or drywall.
Meanwhile, on the sell side, half of companies sold in 2017 were lumberyards. Another 29% were specialty distributors, typically acquired by a company specializing in the same segment.
After a period of reduced acquisition activity in 2015 and 2016, Kodiak Building Partners came on strong in 2017. The group completed three acquisitions in Q4 2017 alone (Drywall Material Sales, American Builders Supply, and Arizona Wholesale Supply). Kodiak also positioned itself for a continued string of acquisitions by taking on growth capital from Court Square Capital Partners. This capital refueling represented further evidence of the existence of pent-up demand for LBM acquisitions.
At press time, almost 70 of the ProSales 100 companies had submitted their surveys for inclusion in the ProSales 100. Together, these groups reported an 8% increase in the number of branch locations, versus 2016. The majority of these new branches were added through acquisitions by groups such as SRS Distribution and Kodiak Roughly 60% of deals in 2017 involved the acquisition of a single location.
In addition to tracking M&A transactions, we also focus on greenfield expansions and closings. In 2017, there were 49 greenfield expansions reported, down from 62 in 2016. This dip in greenfield activity is to be expected at this later stage in the cycle. The number of locations closed has decreased since its recent peak at 58 locations closed in 2015, to just 23 branches closed last year. This is an inconsequential number, relative to the many thousands of LBM branches that exist and is another indicator of the broad-based health of our industry segment.
Acquisition and greenfield activity occurred throughout the country. However, eight states were ranked in the top 10 for both the number of branches acquired and the number of greenfield location openings. These states are areas where acquirers and seekers of organic growth have made significant bets in 2017 (in order of their ranking for branches acquired): California, Texas, Florida, Wisconsin, Washington, New York, North Carolina, and Pennsylvania.
Buyers indicate that EBITDA (earnings before interest, taxes, depreciation, and amortization) multiples for single-location businesses or small- to medium-sized companies range from 4 to 6 times EBITDA. Strong growth, larger size, unusual profitability, and a strong fit with the buyer will push companies to the upper end of that range. The largest deals in the industry are completed at multiples well above the range for smaller businesses. With attractive multiples and strong buyer demand, this is a uniquely attractive time to bring an LBM distributor to market.
