You’d have to be from the planet Venus to have missed the run of big companies—public and private—acquiring hundreds of family-owned LBM retailers. The appetite for acquiring these businesses is fueled, in part, by the age of the LBM company’s owner. Many of the LBM retailers being acquired today are run by the adult children of the company founders. In many cases, the company owners today are often the children of World War II veterans (or other American entrepreneurs in that age group; people born in the 1920s and 1930s).
These LBMers started building material retail locations and truss shops after the war, and they thrived as the U.S. housing market built homes for returning veterans, Baby Boomers (people born from 1946 to 1964) and subsequent generations. Years ago, these founders often bought land for their companies in sleepy downtowns that grew around them over the years, making their real estate very valuable decades later. (Who wouldn’t want six acres in downtown Austin, TX today, if it were purchased in 1945?). The adult children of these business founders—today’s owners—are now often in their 70s, and they do not always have younger family members who want to run LBM businesses, since the younger crowd has opted for white collar jobs. So, the “sell-side”—independent lumberyards with owners eyeing retirement—is really primed to accept meaningful offers for their businesses as they exit.
From the “buy-side,” acquirers like Kodiak, Nation’s Best, Builders FirstSource, BIP, US LBM, ABC Supply, and regional players like TAL Holdings or Spahn & Rose, have snapped up LBM companies, and then relied on scale, cross-selling, and “buying margin,” (e.g. owning their own means of production or verticalizing their portfolios), to drive up the companies’ values, post-acquisition. You may sell your business for 5X EBITDA, but in aggregate, hundreds of these businesses can be worth twice 5X or more when sold together by a private equity group.
Independent owners may ask, “When will the roll-up slow down, or completely run out of gas?” From our point of view, the roll-up still has legs and room to run, as long as there are quality companies yet to be acquired. And there still are many out there. Plus, buyers have plenty of cash for acquisitions. But we think the current roll-up will be measured in years, not decades. And note: many large or multi-location LBM retailers/component plants have already been acquired … or have said they’re not interested in talking just yet. Accordingly, when we are contacted by acquirers seeking LBM operations, so-called “big game,” we say there are fewer of them around now.
The question I’d ask LBM owners on the bubble about whether to pursue acquisition is simple, “Do you want to be on the front end or the back end of a roll-up cycle, especially a roll-up that is unlikely to repeat any time soon once it loses steam?” Our answer: Who today wouldn’t have wanted rolled shares (e.g. taking some of the purchase price as stock) in the first round of acquisitions by Kodiak or US LBM years ago? Secondly, who today wants to own a company seeing an acquisition too late in the roll-up cycle, only to get a weak offer because acquirers already own something else nearby you, or the acquirer considers your company a “nice to have,” and not “need to have?”
In today’s market, with acquirers’ unfettered access to cash (the majority of offers we see are all-cash, non-financing-contingent) and with the prospect of lower interest rates on the horizon, the M&A environment is still very positive for LBM owners to sell their businesses, especially if they are over $2mm Adjusted EBITDA. I’ll end with an Asian saying about potentially missed opportunities, “The best time to plant a tree was 20 years ago. The second-best time is now.” Is now the time to plant that tree and test the market?
