Hardware + Building Supply Dealer

Market Insights: Inside aquisitions

Industry veteran Larry Morgan Examines the art of the sale.

By Larry Morgan

April 9, 2020

[ Editor’s note: The coronavirus outbreak has forced massive alterations throughout society, and the following analysis by financial advisor Larry Morgan has been adjusted with the following preamble from the author. As the outbreak rises, Morgan is involved in two deals that appear to be going forward, and another two appear to be on hold. “I see two competing forces at work here,” Morgan writes. “The equity guys who are the money behind most of these companies who are buying building materials companies have a dilemma. With interest rates near zero they have to do something with their money. Lumberyard bringing down 3% looks like a home run. That explains the two deals going forward. On the other hand, what is the business slow-down going to do to profits even in building materials? That explains the two deals that are on hold.” Morgan added: “There is never a perfect balance between buyers and sellers of building materials companies. During times of stress all the sellers try to hit the exit door at once. And buyers have pulled in their horns. During good times multiple buyers are eager to make Acquisitions but sellers think, why should I sell I’m making lots of money. Several years ago after closing a rather large and complex transaction in Texas, Paul Hylbert, who was CEO of ProBuild at the time, turned to me and said, ‘Larry, every successful acquisition is a miracle.'” What follows are the author’s market insights. ]

It was almost thirty years ago that a fishing buddy in Idaho asked me to help him sell his lumberyard. I had a background in real estate but no experience selling lumberyards. I begged off, but my buddy insisted. So I gave it a shot. Three decades later I find myself having assisted in the sale of nearly a hundred buildings materials companies. For those hundred dealers it was time to sell. But is it time for you to sell? Selling your business is one of the biggest and most difficult decisions you’ll ever make. For my fishing buddy the decision was actually pretty easy. He’d gotten involved in another business that was paying him more every month than he earned from his lumberyard in an entire year. And at forty he had plenty of time and energy to devote to the new enterprise. It was time to sell. What follows comes from my experience working with hundreds of owners in real situations. If the decision is made to sell, the next step is to find “a buyer” or the best buyer among several. It’s not uncommon for buyers to call me with specific targets in mind. From beginning to end, confidentiality is a constant concern. It’s always easy to track down the owner of a building materials company. They’re ALWAYS at the office or out in the warehouse. Maybe you’re looking forward to NOT putting in 10-hour days every day. And even on vacation you find yourself checking in and worrying about the business. You aren’t getting any younger. Maybe it’s time to sell. Perhaps you’re over sixty and have no succession plan and have concerns about the future of your company. My experience is that most owners worry more about their employee’s retirement than they do their own. It’s easy to look up at 65 and find yourself with no exit plan. Maybe it’s time to sell.

A few years ago I was meeting with an owner when he got a call from his CPA. The accountant told him that his books showed he had $650,000 in “earnings.” The owner said, “Where’s the money?” His CPA replied,” look out your window. You spent it on three new trucks, a new fork lift, the new blacktop, and those two new sheds.” If your real profit is in locked up your assets, maybe it’s time to sell. Perhaps you’ve taken your company as far as you can and don’t want to invest the time and money it will take to grow the business. You see the opportunity and want the best for your employees. Several of them have management potential but they have no chance for advancement. A corporate buyer would solve all those problems. Maybe it’s time to sell. This is the longest LBM boom you’ve ever seen. You’ve had your most profitable year ever but realize all booms come to an end. You remember 2008 and don’t want to be find yourself there again. It’s always better to approach a buyer when you’re at the top. Maybe its time to sell. You’re second-generation owners of great company that’s been in existence for many years. A picture of your father who founded the business hangs on the wall behind your desk. You have employees who have been there for 30 years and are now “family.” But your son or daughter just graduated from college and doesn’t want to work in the business. You want your company to stay in business but you’d love to retire. Maybe its time to sell.

The LBM industry is competitive and filled with risk. You make your money when you buy your lumber not when you sell it. Buy wrong and you lose money. And every contractor who buys your lumber makes more on the product than you did. You still love the business but wonder if there might be a better easier way to make a living. You’ve had a great year and your competitor has expressed interest. Maybe it’s time to sell. You love the business and have spent the last thirty years building a great company. You see the advantages of taking your chips off the table but don’t like the thought of having someone else run your company. Don’t worry. The right buyer will want you to stay around as long as you want. You can have your cake and eat it too. Maybe it’s time to sell. Then again, maybe it’s not. Consider this story. I recently completed a deal in the Midwest that I started working on 20 years ago. In 1999 I advised the owner that, even though we had a great buyer, it was too soon to sell. Twenty years later he had quadrupled the business and decided to sell. Our Buyer? The same company that I brought to the table 20 years ago. It just goes to show that here’s no such thing as too early when it comes to finding a buyer. And every transaction is unique. Find someone to help you through it.

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