Tough Call: To buy or not to buy

Tough call to buy or not to buy
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Buying a company is a big step. But buying a company during a pandemic takes a leap of faith. What would you do?

With the longest, weirdest year in history finally in the rearview mirror,  you’re  looking  forward  to a return to some semblance of normalcy. At this time last year, all indications were for smooth sailing, with a strong market for remodeling and new construction, no known shortages of materials, and persistently low mortgage rates. What could go wrong? COVID happened, then instead of disappearing like a miracle within the first few months as some promised, it lingered then spiked after Thanksgiving. Thankfully, the spike was met with news of not one, but two approved vaccines, which will hopefully be the nail in the coffin for this horrible virus.

While encouraged by that ray of hope, you and your team are still struggling to understand the street-level implications for your company.

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The biggest decision you face is whether or not to acquire Crosstown Lumber, a strong local competitor that recently hit the market. You’ve talked with the owners, a savvy husband and wife team who’ve decided it’s time to cash out, leave the business behind, and see the world. Located just over 10 minutes from you, their lumberyard serves a slightly different market (a 50/50 mix of pro and retail, while you’re almost exclusively a contractor yard). Like you, they’ve got a loyal following and a strong reputation in the market.

There’s no question that there are strong synergies between your companies, an opportunity for strategic growth, and for your company to become the undisputed leader in your market. While the price they’re asking (6x EBITDA) seems high, you also know it’s fair, and well within the margin of what similar companies are selling for. With all the M&A activity in our industry, consolidation happening at a pace you’ve not seen in your lifetime, and the fact that your company is well-positioned financially, most of your team views this as a no-brainer.

Hamlet, the senior member of your management team, is urging caution. “To buy or not to buy, that is the question. Whether tis wiser to stay our current course, and to court the slings and arrows of unknown fortunes. Or to take arms in a strategic purchase of a competitor. And by acquiring, end them.”

Hamlet’s not wrong. In normal times, buying a company is a big step. But to buy a company in this economy, when no one really knows what the future holds, is a leap of faith. Then again, it would turn one of your biggest competitors into an asset.

But it’s well known that you’re not the only ones thinking of acquiring Crosstown Lumber. If you don’t buy them, there’s little doubt that someone else will snap them up. And once acquired by a larger company, you don’t know how aggressively they’ll come after your customers.

What would you do?

  • Buy. Do your due diligence, and if everything’s in order, pull the trigger and buy your competitor. This takes them off the market and helps position your company for growth.
  • No. Our industry managed to have strong sales in 2020, but the pandemic is still part of our reality. With so much uncertainty, now is not the time to take on fresh debt.
  • Wait. Don’t feel forced to move more quickly than you’re comfortable. While this may be the right move, do it on your timeline. If someone else buys it first, so be it.
  • Roll the dice. Offer a structured earn-out. That reduces your risk as well as your initial cash outlay—but it’s not as attractive to the sellers, who want cash. It’s a gamble you may lose.

What would you do?

Something else?
If you’d take a different plan of attack, email your suggested solution to James@LBMJournal.com. If we publish your reply, we’ll send you an LBM Journal mug.

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