Trends in Sanitation Industry Sales with Damon Powell, FMC Advisors
Pete talks with Damon Powell from FMC Advisors.
Damon specialises in helping sanitation company owners to sell their businesses. When he first appeared on Get Flushed in Episode 81 in June 202, Damon spoke about the process that sanitation business owners can expect to go through when they decide to sell their company.
In this episode, Damon and Pete discuss:
- the popularity of the sanitation industry in the United Sates over the past few years
- the type of buyers in the sanitation market and the financial structures seen in recent business sales
- the features of sanitation companies that achieve the best sales
- why some sanitation businesses don't sell
Learn more about Damon by visiting www.fmcadvisors.com
Listen to Damon's previous appearance on Get Flushed at https://www.getflushed.online/episode/fmcadvisors
The Exit Strategy Playbook by Adam Coffey
Takeaways:
- The sanitation industry has seen a surge in interest from investors, particularly post-COVID, highlighting the crucial role it plays in public health and safety.
- Damon emphasizes the importance of understanding buyer motivations and market trends to maximize the sale value of sanitation businesses.
- Building a strong management team and maintaining high-quality assets are critical factors that can significantly increase a sanitation company's market value during a sale.
- Business owners should prepare at least 12 months in advance for a sale, ensuring their financials are in order and their operations are streamlined for potential buyers.
Transcript
Hello and welcome to Get Flushed.
Speaker A:I'm Pete.
Speaker A:My guest today is Damon Powell from FMC Advisors.
Speaker A: in June: Speaker A:He's a consultant who specializes in buying and selling sanitation businesses.
Speaker A:When he first appeared on the show, he talked about the process that business owners usually face when they decide the time has come to sell their sanitation company.
Speaker A:In this conversation, we talk about the trends Damon has seen emerge across business sales in the industry over the last few years.
Speaker A:He talks about the type of buyers that are currently in the sanitation market, the financial structure of the deals that he's achieved, the type of sanitation companies that are in most demand, and the reasons why some sanitation companies don't sell.
Speaker B:So I'm joined today by Damon Powell from FMC Advisors.
Speaker B:Damon, you've been a good friend to the show over the last few years.
Speaker B:Welcome back, Pete.
Speaker C:Thank you so much.
Speaker C:I can't believe it's been three years since we last had an episode.
Speaker B:Where does the time go?
Speaker B:Honestly, a blink and it's gone.
Speaker C:That's the truth.
Speaker C:But it's been very fast pace here in the States.
Speaker C:You know, FMC Advisors has stayed extremely close to the liquid waste industry.
Speaker C:We've actually grown since the last time we've talked.
Speaker C:We've added another partner to the business to take care of the overwhelming response we've had to helping the owners of sanitation companies sell their business.
Speaker B:Excellent.
Speaker B:I am.
Speaker B:I've been following your post and your updates.
Speaker B:You've been fairly active attending all of the shows and keeping your hand in so that you're close to people in the industry.
Speaker B:I'm guessing business is booming.
Speaker C:You know, we're doing very well.
Speaker C:And again, the mission of FMC is to help the owners of sanitation companies sell their business for maximum value.
Speaker C:And if we can do that, it's a good day for us.
Speaker C:It's a great day for our clients.
Speaker C:And you are right.
Speaker C:You know, we've been on the trade show circuit early in the year.
Speaker C:I think it is very important for us to keep our finger on the pulse of the industry in talking to not only the sellers and the suppliers, but also the buyers of the industry.
Speaker C:Nearly every buyer reaches out to us because, you know, they're interested in the companies we're bringing to market and understanding what they are looking for in good sanitation targets helps us help our clients.
Speaker B:It's three years since we last spoke.
Speaker B:I listened back to that episode in the last couple of days and we gave some great tips.
Speaker B:Or you gave some great Tips to people who are getting ready to sell their businesses.
Speaker B:And this time, I think we've got a slightly different plan for the content of the episode.
Speaker C:Absolutely.
Speaker C:And I've done a number of other podcasts or videos on how to prepare your company to sell and what buyers are looking for.
Speaker C: nce we last talked in June of: Speaker C:So some of the things I'd like to talk about today, Peter, to really discuss the popularity of the sanitation industry and the type of buyers that are out there, talk about the financial structure of transactions that we're seeing when operators do sell their company.
Speaker C:We can talk about the qualities of companies that are getting the highest value in the industry, what I like to call best in brand.
Speaker C:And then I'll even talk about some reasons sanitation companies do not sell.
Speaker B:That sounds great.
Speaker B:The first one was one that I've been thinking about over the last few days as we've prepared for this.
Speaker B:The restroom business seems to be hugely popular among new entrants and investors at the moment.
Speaker B:Maybe that's a reflection of the fact we came off Covid when Sanitation General's in really high demand.
Speaker C:I think that's part of it.
Speaker C:You know, Covid certainly highlighted the importance.
Speaker C:Importance of our industry, the necessity that our industry has been offering for years, but really didn't get the kudos or support.
Speaker B:The respect or the understanding.
Speaker C:That's the word.
Speaker C:Yeah, the respect.
Speaker B:Yeah.
Speaker C:We were still the butt of many jokes.
Speaker C:You know, we're number one and the number two business, on and on and on.
Speaker C:But I think year over year, we continue to see our industry becoming more professional and being more respected.
Speaker B:And I think that's always going to attract people to come in.
Speaker B:If they see an industry that seems to be forging ahead and people are making good profits, that's obviously going to attract new investors.
Speaker C:Absolutely.
Speaker C:So I always try to come at this with the heart of a teacher.
Speaker C:I don't like just telling people why it is what it is.
Speaker C:I want to help them understand.
Speaker C:So as we talk about the popularity of our liquid waste industry, and specifically portable restrooms, number one, the investors like it because it's got a diverse revenue stream, meaning that no one client typically represents more than, you know, 5, 10, or 15% of the revenue.
Speaker C:You know, most companies have thousands of different clients.
Speaker C:So investors like that all your eggs aren't in one basket.
Speaker C:We've Also seen the rise in popularity of blue collar service organizations.
Speaker C:We've seen in the United States with probably private equity roll ups in the plumbing industry, in the heating, ventilation and cooling industry.
Speaker C: the trash business since the: Speaker C:And we even see garage door repair companies across the country being rolled up so that blue collar service also makes it popular.
Speaker C:And being a route based service, you know, there's always room for consolidation and improvement, meaning that, you know, if you buy a competitor, you can combine routes.
Speaker C:There's some net cost savings there.
Speaker C:So again, that's similar to the solid waste industry.
Speaker C:And then kind of the fourth one is you can't export this work to China or any other country.
Speaker C:It's got to be done here.
Speaker C:Whether you're servicing a portable restroom, whether you're pumping a septic tank or hauling high volume liquid waste, that has to be done here.
Speaker C:And investors like the certainty of that part of the business.
Speaker B:Well, you mentioned all of those other blue collar industries, plumbing and construction, they all rely on sanitation.
Speaker B:They can't operate in many instances without adequate sanitation on site.
Speaker B:So it's almost a given that the sanitation player is going to get work if those other industries are booming.
Speaker C:It's a great point because the overall customer base can be so diverse.
Speaker C:When we look at portable restroom companies, the typical clients are residential construction, commercial construction, industrial special events, agriculture, government, municipalities.
Speaker C:So you've got that nice diverse, not just revenue stream from customers, but also the end user segment.
Speaker C:If one is up, the other one might be down, but you're protected.
Speaker C:That's a neat part of the popularity.
Speaker C:And again, we didn't even mention the profitability of the industry.
Speaker C:Kind of the secret has been out for a few years now that profit margins in liquid waste and portable restrooms are pretty good.
Speaker C:And again, a lot of that started to get highlighted when United Site Services, being private equity backed, was bought and sold a couple times.
Speaker C:So other investors saw that and started seeking out companies like that around the country.
Speaker B:Despite the profitability, I still see regular updates from sanitation providers who've been undercut by other providers.
Speaker B:And it seems that we've a real block in the mindset in the industry that operators themselves think their service is low value and therefore offer stupidly low prices in what I presume is an attempt to win customers.
Speaker B:And it doesn't need to be like that, does it?
Speaker B:Damon?
Speaker C:I.
Speaker C:I agree.
Speaker C:And we hear that too.
Speaker C:And you know, we have clients all across the United States, so we certainly hear that on a regular basis that There's a new entrant in town that's quote, giving away service, unquote.
Speaker C:And I think the reason is because, and I don't know if I'll take heat from saying this, but you don't have to be great in this business to be profitable.
Speaker C:And I think that's part of the problem, that there are lots of corners to cut.
Speaker C:And when we talk later about the best in brand people getting highest values, they're not cutting those corners.
Speaker C:But there are ways that you can provide service at a lower cost.
Speaker C:And I think we will continue to fight that battle until the operators understand that they can charge a premium for this.
Speaker C:And this is a service first business, typically, not a cost first business.
Speaker B:I'm a great advocate for that service first, definitely.
Speaker B:You talked about rollups, companies being bought by larger businesses.
Speaker B:Is there a typical profile for the larger investor?
Speaker C:I'm glad you asked.
Speaker C:So let's talk about the types of buyers.
Speaker C:And again, this has changed since I was a buyer at United Site Services.
Speaker C:And when my partner Ed Medvick and I were doing that, most of the time there wasn't much competition for the companies we were going after.
Speaker C:Once in a while we'd be competing against maybe a local competitor, another investor, but most of the time, you know, it was called a proprietary deal.
Speaker C:We were the only bidder.
Speaker C:And buyers love proprietary deals.
Speaker C:I'll repeat that, buyers love proprietary deals.
Speaker C:However, it's not the way to get the most for your business.
Speaker C:And I'll talk a little bit more about that later.
Speaker C:But some of the types of buyers, and again, these days there are more out there for the reasons I talked about.
Speaker C:And we have a list of well over 50 professional buyers looking to get into the portable sanitation industry.
Speaker C:And these are savvy professional buyers that do this for a living.
Speaker C:And if you want to negotiate with them on your own, you can try that.
Speaker C:It's not encouraged.
Speaker C:In fact, I've got a book called the Exit Strategy Playbook by Adam Coffey.
Speaker C:I was going to reference this later, but Adam Coffey is very well respected.
Speaker C:He's built three separate billion dollar brands in three separate industries.
Speaker C:And he's written a book called the Exit Strategies Playbook to help operators in any industry maximize the value of their business.
Speaker C:And in chapter two, this is a verbatim quote, a competitive sale process with multiple buyers represented maximum value for sellers.
Speaker C:You get multiple buyers bidding on your company.
Speaker C:That's how you maximize the value.
Speaker C:So let's talk about the types of those buyers and most of your Listeners will understand this because they have been getting emails, calls and text from these interested parties, buyers in their company.
Speaker C:So, and some of these clients are getting multiple calls per week and really starts with national, regional and local competitors.
Speaker C:We all know who those are.
Speaker C:And some of those being private equity backed, meaning that there's a private equity firm providing the cash, the capital and kind of the know how to execute those roll ups.
Speaker C:Buying multiple smaller companies to create a larger entity that would be United Site Services as private equity backed in the United States.
Speaker C:Toy Toy in Europe is a private equity backed company.
Speaker C:So those are examples of those.
Speaker C:You've also got individual investors that are now interested in this industry because they've seen the returns.
Speaker C:They may have other businesses that were single digit margin companies and they're seeing that, you know, adjusted EBITDA margins in our industry can be 25, 30 up to 50%, that it's very attractive to individual investors.
Speaker C:You also have search funds.
Speaker C:A search fund is typically one or two individuals who have got their MBA and have got investors lined up, but they are looking for a company to invest in to kind of put their knowledge to work.
Speaker C:It really doesn't matter the industry.
Speaker C:They may be looking at portable sanitation, but it could also be again, plumbing and H vac and any of the other ones we talked about.
Speaker C:So those are called search funds.
Speaker C:And you might also have, for the smaller companies, you might be selling to a family member or an employee.
Speaker C:So although this is not an exhaustive list of the types of buyers, it's probably most of the type that you will encounter when trying to sell your business or in this case now, they're reaching out to you, showing interest in the business you've got.
Speaker B:And they're not exclusive groups of buyers, are they?
Speaker B:They will compete against each other.
Speaker B:Damon Correct.
Speaker C:And that's kind of the interesting thing.
Speaker C:Now the team at FMC Advisors, we have a very interesting viewpoint because as the specialist in liquid waste, these buyers are reaching out to us because they certainly want to be able to bid on the companies that we bring to market.
Speaker C:However, they don't know how many are contacting us.
Speaker C:And obviously by doing these podcasts they'll understand how crowded the market is getting.
Speaker C:But what they are finding is that they are competing for deals.
Speaker C:Certainly the companies we bring to market and you know, even the ones we don't, they're competing for deals.
Speaker C:So they do not get the proprietary deal where they're dealing one on one with the owner.
Speaker C:Sometimes they are.
Speaker C:And we, we have certainly heard of instances where that happens and there are some really good buyers out there, but I think they're looking for deals, they're looking for the right company.
Speaker C:And we'll talk a little bit later in the podcast about what the dynamics of those companies are that they're looking for.
Speaker C:I want to give you an example because I think it really helps to have examples, real world examples.
Speaker C:So a deal we did last year at fmc, you know, it was a major metro area and we had a very fast growing company that wanted to sell for business reasons.
Speaker C:And we identified some large local competitors as being the ideal candidate to be the buyer for that company because we knew as former operators there would be some massive cost savings.
Speaker C:We call those synergies in our industry.
Speaker C:And we were correct.
Speaker C:You know, our client got a multiple that was well above average because the new buyer could recognize the cost savings of route consolidation, combining suppliers, of reducing their miles per stop, increasing their services per hour.
Speaker C:So I think it's important when you're looking at selling your company is to really identify who that right buyer might be.
Speaker C:Because if the intent is to maximize the value of your business, looking at that right buyer, it might increase the value of your business 20 to 50% by finding who that exact right buyer is.
Speaker B:That's really important if the business owner is looking to maximize their return.
Speaker B:So that's really important for them to get best value for them.
Speaker B:I'm guessing sometimes it's not always just about the money, though.
Speaker C:I would agree 100%.
Speaker C:And the first question we always ask our clients, and if you work with any advisor, and again I suggest any Internet search will tell you to use an advisor, whether it's a cpa, an attorney, a broker, an advisor such as the folks here at fmc.
Speaker C:The first question we ask is describe your ideal exit.
Speaker C:It can be different for every seller.
Speaker C:Some are very concerned with who the business is going to go to.
Speaker C:Some it is simply a business transaction.
Speaker C:And like you mentioned, the highest cash at closing is going to win.
Speaker C:It's different in every deal.
Speaker C:We've never done two deals exactly alike.
Speaker C:And I think that's where having the experience of our team and doing 180 some odd transactions, we've seen almost everything, but we're still learning.
Speaker B:You're still surprised by the odd mindset or the odd decision.
Speaker C:Yeah, you still have to follow the playbook.
Speaker C:There's a playbook to sell a company.
Speaker C:And mergers and acquisitions are not easy.
Speaker C:I know there's some people in our industry that have been trying to execute some roll ups and buy some companies that have found out that buying companies are not easy.
Speaker C:If it was, it would.
Speaker C:There would be a whole lot more consolidation.
Speaker B:Sure.
Speaker C:So I think it's the perfect time to discuss the size of companies being sold and kind of how that might affect the ideal buyer for each.
Speaker C:Certainly the portable sanitation industry used to be known as a mom and pop industry.
Speaker C:They said that because, you know, pop was driving the truck, mom was running the office, and they had a few workers.
Speaker C:Okay, that's still true to a sense.
Speaker C:But I think as we've seen consolidation over the past 25 years, that has changed.
Speaker C:So I want to talk about the types of companies out there, and we get calls from.
Speaker C:From all of them, but from a portable restroom type, you know, if you're doing revenue less than a million a year, you kind of fall into one bucket.
Speaker C:Then there's 1 to 5 million dollars a year in revenue, 5 to 10 million.
Speaker C:You've got some policies, procedures in place.
Speaker C:You've kind of figured it out.
Speaker C:You've got an organizational structure in place at that five to $10 million range.
Speaker C:And then I'm just going to use $10 million on up.
Speaker C:Obviously, there's companies such as United rentals and United site services doing much more than that, But I think from a portable sanitation standpoint, just the number of clients out there.
Speaker C:Once you're doing 10 million or above in revenue, chances are you've got some pretty good financial controls, solid operational metrics in place.
Speaker C:Depending on where you fall into those buckets of annual revenue, really kind of helps identify who that right buyer might be.
Speaker C:And I'll say it because of this, most of the larger operators these days, you know, if they're doing 50 million or more in revenue, they're typically not looking for that company doing a million dollars in revenue or less.
Speaker C:You may not be a good acquisition candidate for those larger companies, because, believe it or not, the effort it takes to complete that acquisition is roughly the same as it does to do a $10 million acquisition.
Speaker C:You're going through the same motions.
Speaker C:And what we used to call it was, you know, that $1 million acquisition is not moving the needle.
Speaker C:Yeah, it was great.
Speaker C:If you were operating five miles down the street from a large competitor and you're doing a million in revenue, then, yes, it makes a lot of sense to tuck that company right in.
Speaker C:But if you are 60 miles outside their service area doing $500,000 in revenue, you know, you're probably not going to be a target for some of those larger companies, Although you Think you would be.
Speaker C:But, you know, I'm kind of here to help the owners of companies understand.
Speaker C:Now, if you're doing 5 million, 10 million, 15, $20 million in revenue, like some of our clients are, you're known by the national, the regionals, and most of the private equity funds.
Speaker C:Yeah.
Speaker C:So those buyers will really, really find you.
Speaker C:Or when they come to us, and when we prepare a company for sale, we talk about who the right buyer might be and is anyone on the no go list from a client?
Speaker C:You know, we have clients that say, hey, I'll sell to anybody but ABC Company.
Speaker C:Yeah.
Speaker C:So I think it's important to understand that.
Speaker C:And again, I'll give you another real world example that we were proud of.
Speaker C:We had a smaller company, you know, doing a million and a half, two and a half million in revenue.
Speaker C:And when we spoke with the seller, she wanted a two and a half million dollar sale price.
Speaker C:I felt that was a little less than we could get.
Speaker C:And we were working with her CPA because her CPA was also trying to find her some buyers.
Speaker C:Well, the CPA brought a buyer that had to work through us because the client was engaged to us.
Speaker C:And they offered under $2 million.
Speaker C:And they thought they were doing her a favor.
Speaker C:And I told them I respected that offer, but I think we could do better.
Speaker C:So we identified another operator in the area that we knew was on the acquisition trailer.
Speaker C:And it was an honor to call her and tell her that I had an offer for $4.5 million for her company.
Speaker B:That's incredible.
Speaker C:Her exact words to me were, I won't be able to spend all that money the rest of my life.
Speaker C:I mean, that's kind of the greatest compliment that we could get.
Speaker C:Again, that's why we started the business.
Speaker B:Well, that would give everybody a warm, fuzzy feeling on the inside.
Speaker C:I'm sure it does.
Speaker C:And again, that's not every situation.
Speaker C:I'm not here to promise that in any deal, and there's certainly companies that we have not been able to sell them.
Speaker C:I'm just as happy to talk about those because those are the learning opportunities.
Speaker C:But you know, when you do have a chance to do that, it makes you feel like you're doing a good job.
Speaker B:It's almost a pyramid, isn't it, with the bigger companies at the top who've got the financial muscle to be able to buy up the larger sanitation businesses.
Speaker B:And you might fall into the trap of thinking that eventually there'll be one or two companies nationwide.
Speaker B:And if you need a portable restroom, you'll have to go through one of the really large multi merge businesses.
Speaker B:But the reality is every time one of those mergers happens, it leaves a vacuum at the bottom, doesn't it?
Speaker B:And there are new entrants who will creep into that space.
Speaker B:So it's almost sort of self perpetuating that we need those mergers to create the space for the smaller mum and dad operators to come back in.
Speaker C:You're very perceptive, Pete.
Speaker C:And that's exactly what happens.
Speaker C: ion dollar roll ups since the: Speaker C:So again, common wisdom would say, hey, at some point there's only going to be two or three.
Speaker C:Yeah, but because of exactly what you said, it leaves the vacuum for better service, timelier service, more personable service.
Speaker C:So big guy buys medium guy, small guy grows and becomes medium guy, new entrant grows to become small guy and the cycle repeats itself.
Speaker B:And that's not a criticism of bigger companies.
Speaker B:There are some huge companies out there who do fantastic work.
Speaker B:They've got great equipment, great people and they really deliver on service.
Speaker B:But sometimes the bigger the company, the bigger disconnect between them and their customers.
Speaker B:And this is a very personable industry and a lot of work is done on relationships and faith and trust in each other from a customer and a vendor perspective.
Speaker C:No, you're right.
Speaker C:And I think it's the value proposition that each company brings.
Speaker C:Again, the waste management of the world.
Speaker C:I worked there for 10 years, fantastic company, taught me a lot about what I know today.
Speaker C:Great business, consistently voted one of the best places to work, you know, in the United States.
Speaker C:Again, their value proposition is one thing.
Speaker C:And although it doesn't resonate with everyone, the market is big enough to where there's enough room for, you know, hundreds if not thousands of operators in both solid waste and liquid waste.
Speaker C:But to your point, yes, because of economies scale, it does make sense to grow by acquisition as opposed to just trying to grow.
Speaker C:They call it organic growth or green field.
Speaker C:Just letting it happen by itself.
Speaker B:Yeah, definitely.
Speaker C:Let's move in.
Speaker B:So.
Speaker C:Oh, go ahead, Pete.
Speaker B:No, I was just going to see if I could give you a feed into the next bit.
Speaker B:I think you want to talk about financial structure.
Speaker C:Yeah, I did, absolutely.
Speaker C:Transaction structure.
Speaker C:Again, I'll speak from experience.
Speaker C:When we were doing deals at United Site Services, you know, typically it was, you know, cash at closing, that seller would hand us the keys and move on do something different.
Speaker C:Rarely would they stick around.
Speaker C:But, you know, it did happen a few times.
Speaker C:What we're seeing now, the difference between then and now is there are multiple transaction structures.
Speaker C:And one of the things we do at FMC Advisors is continuing education to help owners understand that there are structures out there where you can stay at the business, where you can help continue to grow the business.
Speaker C:And in fact, there are buyers out there that prefer that.
Speaker C:So while one transaction structure is cash at close, you give them the keys on a Friday, you head out Monday, and maybe you answer the phone when that buyer has a question.
Speaker C:Now there's a structure to where the buyer may buy all or part of the business, leave you as the owner, if you want to, as the brand ambassador.
Speaker C:You continue to be the CEO, president, general manager, whatever that might be to help control that growth and manage that growth going forward.
Speaker C:Why some of our clients find that desirable is maybe they have some or a large amount of debt they're uncomfortable holding, you know, under their personal name or business.
Speaker C:And a new buyer comes in, buys the company assumes the debt would also provide the capital to help grow the business going forward.
Speaker C:So that structure is desirable for some sellers that may be in their 30s or 40s, not ready to retire, but, you know, still enjoy the industry.
Speaker C:Like we've talked about, they couldn't see themselves doing anything different.
Speaker C:As we continue to kind of go down from the top down, we're now seeing these private equity companies and other individuals want the sellers or the owners of the company to, quote, roll equity into the new business.
Speaker C:And I'll give you an example that can probably be as simple as possible.
Speaker C:Let's say a company is valued at $10 million, and the buyer wants that owner to roll 2 million in equity, okay, or 20%.
Speaker C:He would roll 20% of that into the new business.
Speaker C:There's a new company, there's a holding company.
Speaker C:So they would then own a number of shares in that new company.
Speaker C:Thought being that they stay on or they leave.
Speaker C:But that new company then grows the business by making more acquisitions, it becomes even more valuable.
Speaker C:And when that the new company sells again in three, five, or 10 years, that 20% equity that the owner rolled would now be worth a much greater amount than it was.
Speaker C:And again, the owner may stay or leave, but they may have the ability to roll equity.
Speaker C:You've also got situations where the buyer may want the owner to hold some of the paper or provide some of the financing to that deal.
Speaker C:And again, that might be, let's say you are Living in a high tax state, Massachusetts, Illinois, California, it may be advantageous for that owner to take part of their sale price and finance that for the new buyer.
Speaker C:From a tax standpoint, that can be advantageous.
Speaker C:It's probably same around the world.
Speaker C:I don't know tax law in other parts of the world.
Speaker C:Everything I'm speaking about is in the United States.
Speaker C:And we always ask our sellers to get a CPA's advice.
Speaker C:We don't provide CPA advice and what we're doing now is just talking hypotheticals, but you know, we know our way around a little bit, so you've got that.
Speaker C:Now on the other end of the spectrum, we have seen some new buyers come in that maybe you've seen or heard these advertisements about buying businesses, no money down, this, that or the other thing sounds too good to be true.
Speaker C:Those buyers, when they come through and make some offers for our clients, they typically don't get many calls back.
Speaker C:Because if you're really looking for that, I will call it creative financing structure.
Speaker C:Most if not all our clients aren't interested in that.
Speaker C:So I would just say beware if you're a seller, the buyer, if you're going to do this on your own, you really need to do your diligence ahead of time before you waste a lot of your time in the process of sharing data, doing site visits, this, that and the other thing, only to get an offer that you just shake your head at and go, what is this again?
Speaker C:That's important.
Speaker C:It's one of the things, if you work through an advisor or an attorney, they should vet those buyers out before it even gets to that spot.
Speaker C:So I think those are some of the transaction structures that we see cash at closing most of the time with some sort of hold back just to keep everyone honest, equity rollover piece and then some maybe owner financing.
Speaker C:And one thing I will say, and you can Google this on the Internet, the smaller the deal, the higher percentage that that deal is going to have some owner financing.
Speaker C:When I talked earlier about, you know, you're going to sell to an employee or you're going to sell to a family member, I've read different articles that, you know, if you're doing a deal that the purchase price is under a million dollars, I think close to 75% of those deal are going to have some form of owner financing in there.
Speaker C:So if you're doing a small deal by yourself, let's say you're bringing in 5, 6, $700,000 a year and you want to sell to a Local individual or an employee, you're probably going to have to hold the paper.
Speaker B:Do you ever see a restraint of trade clause imposed when people sell a business?
Speaker C:Yeah, certainly every deal we see that I've ever been a part of has a non compete clause in it.
Speaker C:Because you know, when any buyer hands someone a pile of money, the last thing they want is for them to go into business and compete with them, you know, around the corner.
Speaker C:And that's one of the things that we talk to our potential clients about ahead of time.
Speaker C:We kind of walk them through the process to help them understand what it's going to look like before they even get there.
Speaker C:We don't want a client one week from closing finding out they have to sign a five year non compete and they block and you know, we've wasted a lot of time and effort on that.
Speaker C:But it's very commonplace to see 5 year non competes in our industry.
Speaker B:Yeah, that's a fair stretch.
Speaker B:Five years it is.
Speaker C:Most of the folks, I mean in the United States, you know, they call it the baby boomer generation.
Speaker C:You know, thousands and thousands of businesses are going to be trade hands here in the next few years because those folks are retiring.
Speaker C:In this industry, the majority of second and third generation do not want the business.
Speaker C:Although I talked to a gentleman the other day who's fourth generation is in the business.
Speaker C:But that's fantastic.
Speaker C:And that's kind of one of the fun reasons to be in, in our industry.
Speaker B:The sanitation industry is such a family based social structure.
Speaker B:You know, everybody knows everybody and if you sell up and you've got a non compete clause and you're not involved with that, there'd be a little bit of pain come your way, I imagine.
Speaker C:Yeah, a little bit.
Speaker C:And we've seen people, you know, you know, sell a business in the northeast and want to move to the southeast and buy a business where they're non compete isn't enforced.
Speaker C:But no, that's why, you know, you see a lot of my, my videos.
Speaker C:I start out Sanitation Nation because I think we are kind of this, this close knit.
Speaker C:Hey, if you've pumped a portable restroom or a septic tank or picked up trash, you've kind of got this camaraderie with people that you know, hey, you know what I deal with on a daily basis.
Speaker B:So non compete might sound nice.
Speaker B:If you put a few million dollars in the bank and you've walked away the 5 year non compete clause, you might think you're going to be lounging by the pool and swimming every day.
Speaker B:And doing all of those fun things.
Speaker B:But if you've got that work ethic and you engaged and you active in the industry, just be aware of that.
Speaker B:Be aware of the fact that you're going to have to step back and not have such a hands on, forthright.
Speaker C:Role if you've sold well.
Speaker C:And to that point we have clients where we've sold multiple of their businesses, they've done exactly that.
Speaker C:So again, when it's in the blood, it's in the blood.
Speaker B:Yeah, definitely.
Speaker C:I think that's a good, good segue into.
Speaker C:Let's talk about the qualities of companies that are kind of getting that highest value.
Speaker B:Sure.
Speaker C:What is that ideal company?
Speaker C:If Damon and Pete were going to start, you know, the best sanitation business and we want to buy one.
Speaker C:So here's what we'd be looking for.
Speaker C:I go from probably the institutional buyer, that private equity or the, or the large national or regional.
Speaker C:They want $2 million in annual earnings or more.
Speaker C:$2 million in EBITDA.
Speaker C:We won't go into that.
Speaker C:Just Google EBITDA.
Speaker C:EBITDA because they call that a platform acquisition.
Speaker C:You've got a company, if you're doing 2 million in annual earnings, you're probably in the 6 to 10 million dollars in annual net revenue or gross revenue.
Speaker C:So you probably got your ducks in a row.
Speaker C:You understand what you're doing.
Speaker C:It'd be located in a major or a mid major market area where there's good population density.
Speaker C:So even though you were doing 2 million in annual net earnings, you could still grow it.
Speaker C:The qualities of companies getting the highest value, they've got quality equipment, they've got a timely replacement of their rolling stock, meaning their trucks and their restroom trailers and their portable restrooms.
Speaker C:Their revenue and earnings are growing again, you want that best in breed.
Speaker C:You want to tell a great story to that potential buyer.
Speaker C:You want to maximize the value of your business, make sure it's growing in both the top and bottom line.
Speaker C:You have a management team in place that is staying with the business.
Speaker C:And I cannot emphasize this enough, almost every company we bring to market, the buyers ask how active are the sellers and are they staying or leaving?
Speaker C:Is there a management team in place?
Speaker C:Because I don't care who you are, if you have to go in and upset the apple cart and replace management, that could change the whole culture of a business.
Speaker C:So that's extremely important when you're thinking about preparing your company for sale.
Speaker C:Put a management team in place and that might be one person that might be a general manager, but you have to take yourself out of the day to day.
Speaker C:And that's one of the hardest things.
Speaker C:We see Those companies doing 1 to 3 million in revenue because it is a net negative.
Speaker C:Profitable.
Speaker C:If you have to bring a general manager in and pay them 70 to $150,000 a year, that comes off your bottom line to start.
Speaker C:You step away, you pay them.
Speaker C:It's another expense, but it's an expense you have to invest in if you want to grow that business.
Speaker C:It's important to have reliable financials.
Speaker C:For the past three to five years, operational and financial metrics are in place and you monitor them.
Speaker C:We've talked about this and I've talked about another podcast.
Speaker C:Understand how many services you're performing per hour, understanding your average miles per stop.
Speaker C:And then you're tracking that and you're holding people accountable to that.
Speaker C:And then also your financial metrics that make sure your, your net margin is holding.
Speaker C:And then another part, this is not a fully exhaustive list, but it's pretty exhaustive.
Speaker C:No customer represents more than 10% of your revenue or earnings.
Speaker C:And this is one that can kill a deal.
Speaker C:And I'll talk about it more when we talk about why companies don't sell.
Speaker C:So this is the double edged sword for a seller, meaning that I'll use the home builder example.
Speaker C:I live in Florida.
Speaker C:Home building has done very well for the past few years.
Speaker C:If you have a large national home builder that is begging you for more and more units and it's a great deal, you just keep putting them out and then all of a sudden you look and you're like, oh, Lennar or Taylor Morrison is 50% of my revenue.
Speaker C:But it's very hard for you to say no when they call and order 10 more units, right?
Speaker C:Because to you it's fine.
Speaker C:It's only a net negative.
Speaker C:When someone wants to buy the business and said, hey, they're 50% of your business, or you've got a large industrial client that's 80% of your business, but you are making money hand over fist.
Speaker C:As the seller, it's hard to say, sorry, I can't give you any more work.
Speaker C:The right thing to do would say, I'm going to keep taking all the work from Lennar, but I need to focus on my agriculture or my special events or my commercial construction more to even out that revenue.
Speaker B:Seeing that here Locally, we had one restroom provider and there are maybe 20 businesses in our city, 400,000 people, 20 restroom suppliers, and one of them serviced the largest home builder on the south island, had over 500 units out just in Christchurch and Post Covid.
Speaker B:That construction company decided to swing their operation and redeploy everything to the Queenstown area.
Speaker B:And the supplying company didn't have a presence in Queenstown and weren't able to provide the services.
Speaker B:And they've lost a huge amount of market share as a result of that deal.
Speaker C:Yeah.
Speaker C:And like I tell a lot of clients, there's rarely a wrong answer.
Speaker C:There's just any answer.
Speaker C:Right.
Speaker C:I mean you, you, as long as they're paying their bill and it's a good company of yours and they're probably begging you to go to some other service areas, they want you to do more.
Speaker C:Because when you're a good service provider, they're like, hey, I'm in Dallas.
Speaker C:Can you go to Fort Worth?
Speaker C:Can you go to Houston?
Speaker C:Can you go to Waco?
Speaker C:They want you to grow.
Speaker C:It's not easy being a business owner.
Speaker B:Good challenge to have.
Speaker C:Yeah.
Speaker C:And I want to give you another an example of kind of that Best in breed.
Speaker C:We had a client last year that did very well and they really checked almost every box on there.
Speaker C:If I'm looking at it again, I think they did and probably more.
Speaker C:And the neat thing is every time we called that owner and asked him a question without looking at a computer, he knew it.
Speaker C:He knew the numbers, he knew where things were going.
Speaker C:He knew what he had bought, he knew what the growth prospects were.
Speaker C:He was intimately involved in the business.
Speaker C:And you know when you've got a client like that that gets it when they're in front of a buyer, that comes across too.
Speaker C:And he get, he gets a real premium for that, that knowledge.
Speaker C:So that was a fun one because again, there's times when we have to pry information kind of out of our clients hands or they've got to go to a.
Speaker C:A CPA or say, I've never been asked that question.
Speaker C:So if you understand your business like I think most people do and we see them at the PSA I and I'll give a shameless plug for the psa.
Speaker C:Portable Sanitation Association International.
Speaker C:Veronica Crozier, you're doing a fantastic job.
Speaker B:Veronica's on the show next week.
Speaker B:Yeah, I'm going to release this episode first and then the Veronica episode after that.
Speaker C:Love it.
Speaker C:If you're not a member, become a member.
Speaker C:If you haven't been a member in five years or more, reach back out.
Speaker C:Because it's a great organization.
Speaker C:There's tremendous training opportunities out there.
Speaker C:All the things we're talking about you can probably find They've got an educational library.
Speaker C:So psai.org fabulous organization.
Speaker B:If a company's trucking along, they're doing pretty well, but they haven't got all of those key factors that you've described in place.
Speaker B:They're going to need to do a bit of work to get themselves ready for sale.
Speaker B:And is there a timescale that you recommend to people?
Speaker B:Is it one year, two years, three years?
Speaker C:I think 12 months is a great number to start at.
Speaker C:It's almost, and I use this analogy quite a bit.
Speaker C:It's like us men trying to go to the doctor, you know, we don't go get physicals typically until something really hurts.
Speaker C:And trying to sell a business, you know, most people have never done it, so they think about it and they know they need to do something about it.
Speaker C:But they kick that can next week, next month, next year.
Speaker C:And then all of a sudden they've called us and they're 76 and their wife is begging them to retire.
Speaker C:And these are real world.
Speaker C:And then you don't have a whole lot of time.
Speaker C:Again, I think that the industry continues to get more and more professional.
Speaker C:There's more and more folks like myself and some other consultants and advisors out there and just like you're doing spreading the word and the PSA, I think that helps.
Speaker C:So if you could start 12 months out, that gives you plenty of time.
Speaker C:It takes a business typically 8 to 12 months to sell our industry.
Speaker C:I think it's a little less than that if you're a quality business, if you tick a lot of those boxes we just talked about, simply because the number of buyers that are out there, we can get companies sold.
Speaker C:We've done it in as little as 75 days, but sometimes it does take a year.
Speaker C:So we always tell our clients it's probably a six to 12 month process to get the company sold.
Speaker C:And we won't go through the whole process.
Speaker C:The steps in that here we've got other, you can check out other podcasts for that.
Speaker C:But I think 12 months is a good time because it will go fast.
Speaker C:But that will allow you time to clean up the yard, clean up the financials, work with someone like FMC advisors to put a business summary together so that when you do go to market, you've got something to take to market and you're not just calling a competitor saying, hey, I think I want to retire.
Speaker C:Are you interested in purchasing my company?
Speaker C:Then the buyer is in power, they are making the request to you as opposed to when we're running the process, you know, it puts us in a much better position for our client.
Speaker C:We are proactive as opposed to being reactive.
Speaker C:We sold two companies last year where they were widows.
Speaker C:Their husbands had passed away in the previous year.
Speaker C:They were left with the company.
Speaker C:So we were able to help them make smooth transitions.
Speaker C:But, you know, that was one where again, you don't want to get to that point.
Speaker C:But if you do, you know, luckily we were able to work together and get them smooth transitions out for a value that they were pleased with, as opposed to being what I would consider a distressed sale.
Speaker B:That probably moves us nicely into the, the last segment that you want to talk about, which is the businesses that are difficult to sell or don't sell.
Speaker C:There's no wrong answers.
Speaker C:There's just answers.
Speaker C:And we've had clients from almost every state and no one's going to fault you for where you started your business.
Speaker C:That's what it is.
Speaker C:You can't relocate a service business.
Speaker B:Yeah, it's geography.
Speaker C:But again, at the same time, from an exit standpoint, that is going to affect the value.
Speaker C:So the number one reason some sanitation companies don't sell is their location.
Speaker C:There may not be a major metro.
Speaker B:Or a growing area just in the wrong place.
Speaker C:You know, we do know these businesses do well in rural areas.
Speaker C:They're doing portable restrooms, maybe they're doing septic, maybe they're covering 100 miles.
Speaker C:But when you look at who could or should buy you, it's very narrow market.
Speaker C:So that, that location, proximity to competitors.
Speaker C:You know, we do a lot of pro bono consulting with small companies that, you know, we really can't assist if they're doing 3, 4, 500,000 in revenue in a very rural area.
Speaker C:Our advice is to go to a competitor you trust because they're the most likely buyer because they have some cost synergies.
Speaker C:You know, they could move your stuff to their yard.
Speaker C:You know, some of your listeners are going to be operating their business off their own property.
Speaker C:Right.
Speaker C:So a condition of that sale is you need to move the business.
Speaker C:That can be a hindrance when you're trying to sell.
Speaker C:So, you know, if you've got a great business but it has to move from the site, that's just one thing a new buyer has to contend with.
Speaker C:Maybe they have to go find, buy or lease property.
Speaker C:It's going to make that process a little longer.
Speaker C:So I think that's location is super important.
Speaker C:The second is the owners of the management are not staying with the business.
Speaker C:We talked about it earlier.
Speaker C:The first question Buyer asks, who's running it today?
Speaker C:Well, I'm running it.
Speaker C:Who's going to run it once you sell it?
Speaker C:I don't know if there's not management in place, that's why going to a local competitor makes a lot of sense because they may already have a manager.
Speaker C:Obviously, if you price the company above market value, that's going to make it very difficult to sell.
Speaker C:Yeah, we talked earlier.
Speaker C:There are a number of buyers out there right now, but they are professional buyers and very few are going to overpay for a business.
Speaker C:You'll get the highest valuation in the market if you run a competitive process with someone like us.
Speaker C:But people start hearing multiples and multiple buyers, they might think, hey, I can sell for a number.
Speaker C:Way above value.
Speaker C:I don't think way above value is correct.
Speaker C:I think high end of the market is fair.
Speaker C:But, you know, if you're asking a price that's well above market value, you're probably not going to get it.
Speaker C:Or if you get it, if you get the letter of intent signed, the deal can fall apart through the due diligence process and nobody has fun getting left at the altar.
Speaker C:Condition of your assets.
Speaker C:We talked a little bit about, you know, best in breed companies or best in brand companies have high quality assets.
Speaker C: If your newest truck's a: Speaker C:I said this before, it's okay to have old assets if your plan is to.
Speaker C:I bought my last truck seven years ago and when that one goes, I'm out of business.
Speaker C:Okay, that's fine.
Speaker C:But it's going to have an effect on the value of your business.
Speaker C:So condition of assets may be a reason why deals don't close.
Speaker C:And I've been part of transactions where we've just let the owner keep the trucks.
Speaker C:Sell the trucks on your own.
Speaker C:The buyer does not want them.
Speaker C:Status of employees.
Speaker C:It's kind of an interesting one.
Speaker C:So if you got part time employees, your pay structure, maybe it's under the table.
Speaker C:Maybe it's a lot of these other odd ways to pay employees.
Speaker C:If you're doing that, although it works for you.
Speaker C:Now, the new buyer is going to have some serious questions about that.
Speaker C:And then again, if you're not offering any benefits and the new company offers benefits, that's a negative synergy.
Speaker C:Meaning that if you pay your employees $15 an hour, no benefits, the company that's purchasing you is paying or wants to purchase paying $20 an hour with benefits, they've got to add that cost in.
Speaker C:So they've got to lower the purchase price to adjust for that.
Speaker C:So the way you treat your employees may have an effect, or it may ultimately cost you the sale of the business.
Speaker C:Yeah.
Speaker C:And the last one I'll talk about is timing.
Speaker C:And this is a hard one for sellers to understand because they may have a good company and they may have a fair asking price, but deals are done when timing and price intersect.
Speaker C:I've had buyers say, I love the company.
Speaker C:I'd be happy to pay that, but I got so many other things going, I cannot buy them for the next six to eight months.
Speaker C:And a seller just looks himself and say, what are you talking about?
Speaker C:Why can't you just do this?
Speaker C:Well, some of these institutional larger buyers, they have a pipeline of deals they're doing, and they know every month I'm closing a deal and you have to get in line.
Speaker C:So timing can be a reason that a company doesn't sell.
Speaker C:You know, I'll give you an example of a company that we didn't sell.
Speaker C:We had a company doing a million million and a half in revenue, Great margins, pretty decent equipment, but a very rural area.
Speaker C:There was not a major.
Speaker C:One of the major competitors anywhere within 75 or 100 miles.
Speaker C:The minor competitors, you know, there were four or five of them shuffling business around.
Speaker C:They were all about the same size, and nobody had the cash or wanted to buy the business.
Speaker C:So you had a great business in a pretty decent area, but it just didn't sell.
Speaker B:No buyers.
Speaker C:And it happens.
Speaker C:And we try to be very transparent with the people we work with that we want to bring on as clients, but there are times when the deal just don't happen.
Speaker C:Now we feel that we can at least give it the best shot by running it through our entire buyer network and, you know, being transparent about the process.
Speaker C:But there are times when they just.
Speaker C:They won't sell.
Speaker B:Just doesn't work.
Speaker B:Yeah, I'm really interested to hear your points about employees.
Speaker B:That's a really salient point for people to hear and understand there, that treating you people properly now and showing their true cost to the business is such an important part of the sale process.
Speaker C: t being in the industry since: Speaker C:Right.
Speaker C:With employment in the United States, and again, I'm just speaking from what I've seen here, but wages had to go up significantly after Covid, and it forced owners to raise their prices.
Speaker C:Owners have been very reluctant to raise rates in our industry forever Covid and the rapid inflation forced them to pull that price lever.
Speaker C:And here's what most found.
Speaker C:I raised the price and no one squawked, no one left.
Speaker C:I raised the price again and I didn't lose any customers.
Speaker C:And they're, they asked themselves, why haven't I done this, you know, for the past 20 years.
Speaker C:But what that did is back to your point to your employees where this is no joke.
Speaker C:When I started looking at companies at United site, you know, we saw local operators paying their, their operators 10 to $12 an hour with no benefits.
Speaker C:That was a Porto truck driver back in the day.
Speaker C:Right now it is not uncommon to see 22 to $30 an hour with some sort of benefit package.
Speaker C:That's a dramatic difference.
Speaker B:It's even happening in New Zealand.
Speaker B:The competition amongst companies for drivers is quite intense.
Speaker B:We've heard of headhunting and poaching and offering crazy deals and golden handshakes because we may not appreciate this enough.
Speaker B:But the role of a sanitation driver, an experienced sanitation driver with a good work ethic and a great set of cleaning standards, that's actually quite specialized and quite in demand.
Speaker C:I think it's almost hard to quantify how important that type of person is.
Speaker C:Pete, when you factor in maintenance on the truck, you have people that treat their, their equipment very well.
Speaker C:You have people that have no customer turnover.
Speaker C:You know, Steve's got a route where I haven't had a complaint call in five years.
Speaker C:And Steve cleans his truck on the weekend.
Speaker C:And this is no joke.
Speaker C:We had a driver when I was at United site and I won't say his name, but he took, he detailed his truck every weekend.
Speaker C:And I am not ashamed to say if I dropped food on the floor of his truck, I would pick it up and eat it.
Speaker C:It was that clean and he never had complaints.
Speaker C:So you're right.
Speaker C:What is that worth?
Speaker C:I can't quantify it.
Speaker B:And that employee is not, it's an asset to the company, but it's not company property.
Speaker B:That, you know, that person is not company property.
Speaker B:And a new buyer might think that all of the, you know, be great if all of the staff who are performing well and have built that business transition into the new structure.
Speaker B:But it doesn't always happen.
Speaker C:I think our industry that starts at the top down from the owners or the managers or general managers, whoever is managing these, the frontline service techs that do the great job that they have to show that there's really no title that as a manager and owner, you'll get in the truck and you'll do the exact same thing they will right beside them.
Speaker C:And then those type of employees, you know, they really respect that when there's no titles.
Speaker C:And that's the neat thing about this industry that the companies have done very well.
Speaker C:It's when it's all hands on deck, it's all hands on deck.
Speaker B:Yeah, definitely.
Speaker B:That leads into a question.
Speaker B:Is there a personality type or a business owner type who's more suited to achieving a high value sale?
Speaker C:Well, I think it's an attention to detail and our industry.
Speaker C:I've described it.
Speaker C:A lot of people have described it.
Speaker C:It's a simple business, but it's not easy.
Speaker C:And it's simple with a lot of details.
Speaker C:Literally you drive from point A to point B and you service a portable restroom.
Speaker C:You know, to most people that sounds very easy, but there are also a thousand corners to cut as that service tech.
Speaker C:And we've all heard those type of stories.
Speaker C:So I think an owner that has an attention to detail that also has, you know, respect for people, that's very important.
Speaker C:Route based drivers are an interesting bunch themselves.
Speaker C:Right.
Speaker C:The route based driver likes the certainty of I know what I'm doing today.
Speaker C:I'm running my route, I'm doing this, this and this.
Speaker C:So what have we seen in companies where they move?
Speaker C:Steve, hey, you're going to do this route today and that route tomorrow and you're going to do P and D the next day.
Speaker C:Steve says, you know, I'm going to go do something else because I'm not wired that way.
Speaker C:We are seeing much and more professionalism in the sanitation industry.
Speaker C:Better equipment, front and rear facing cameras, you know, the safety, because at the end of the day, everyone should get home safe.
Speaker C:That's a stalwart of our industry, the sanitation industry.
Speaker C:Safety.
Speaker B:Damon, it's always a pleasure to talk to you and I can't imagine that there are many other consultants or advisors who've got the sheer breadth and depth of experience of this industry that you bring.
Speaker B:It's always wonderful to have you on the show and I'm sure the listeners will learn a lot and really benefit from hearing your advice in this episode.
Speaker C:I appreciate the kind words and always happy to help and already looking forward to the next time.
Speaker C:Pete.
Speaker A:I'd like to thank Damon for taking time to prepare for and record this episode with me.
Speaker A:He's an absolute wealth of experience.
Speaker A:That surely makes him one of the world's leading experts in this field.
Speaker A:It's an absolute privilege to hear him share that knowledge with us all.
Speaker A:I'll put links to the FMC Advisors website and to episode 81 with Damon in the notes for the show, as well as a link to the book that Damon mentioned, the Exit Strategy Playbook by Adam Coffey.
Speaker A:Once again, thank you for your time.
Speaker A:I've been Pete and you've been listening to Get Flushed.
