By the time this column runs, the M&A transactions I reference below will be old news, but the acquisition trend they illustrate will remain in the news for 2025 and beyond.
In a string of recent acquisitions, Builders FirstSource acquired Kleet Lumber, a new addition to third-quarter 2024 acquisitions including High Mountain Door & Trim, Reno Truss, Sunrise Wood Designs, Wyoming Millwork, Western Truss and Components, and CRi (an installer of windows and doors). Clearly, Builders FirstSource is adding companies to its portfolio that are not traditional lumberyards.
Another example can be seen in the recent acquisition by Kodiak Building Partners of Liberty Doors & Windows. Kodiak continues to buy straight-up lumberyards, and that won’t slow down. But Kodiak, like Builders FirstSource, has also made multiple acquisitions in door/millwork, gypsum, and interiors, including appliances.
What gives?
Well, acquirers like Kodiak and Builders FirstSource are “buying margin.” And it doesn’t take an MBA from Stanford to see why. Let’s take a deeper look.
Say you run a traditional lumberyard, but you lack a door and millwork shop and a truss/component manufacturing plant. You also sell truckloads of windows, but you have no installed sales.
Let’s also say that you have built up a solid pro customer base that has rewarded you with loyalty for your fair treatment of them and your error-free, on-time deliveries. With that goodwill, you could sell them into more product categories, if you only had those additional categories to offer. You see your customers’ architectural plans during take-offs, and it’s killing you that they are buying necessary items that you don’t offer.
In other words, you’re leaving money on the table and someone else is picking up the margins (GPM and EBITDA percentage) on products that you know your customers are buying—just not from you.
Let’s do some math. Say that your current gross profit margin is 20%. That blends in the relative lower gross profit margin you get from commodity lumber, while seeing higher gross profit margins from items you sell, like insulation, shingles, and EWP. Assume your sales are $30 million. Your gross profit would be $6 million. After you factor in OPEX, which we can assume you have well under control, your EBITDA margin is 10%, meaning that your EBITDA is $3 million.
Now, let’s say you add a truss/component plant, and millwork/door shop. Since these are higher margin products—items that you are now selling—let’s assume that your gross profit margin for the new lines is 30%, and you are enjoying $5 million more in sales revenue with your added products; now it’s a 16.6% increase in sales. Now your sales are $35 million, and you are operating at a higher gross profit margin. Your gross profit dollars tick up to $7.5 million. That’s the $6 million at the lower GPM, and the $1.5 million from the incremental higher margin sales.
For now, assume that your OPEX as a percent of sales doesn’t change. In this case, your EBITDA margin would increase to 13% from 10%. Your resulting EBITDA dollars will increase from $3 million to $4.5 million, a 50% gain, because you captured the margin you were losing to others.
This is exactly what Builders FirstSource and Kodiak are doing. They know they have customer goodwill, and they are leveraging that to capture the sales in product categories that their core lumberyards aren’t always offering. Since these companies don’t have to be actually housed within the core lumberyards’ locations, companies like Builders FirstSource and Kodiak can shop that business across town, only this time it’s “to themselves,” and not to a competitor. They have captured those dollars, millions of them, by packing complementary businesses around their core offering.
