READ THIS BEFORE YOU ATTEND THE SAIA CONFERENCE IN DENVER
Let’s Get Real About Business Sales in the Scaffolding Industry
I am looking forward to seeing many of you next week in Denver. Typically, I would be collecting my thoughts to present them in person at the conference, but it appears that I remain in the penalty box from my last SAIA speech a couple of years ago about the supply side of the scaffolding industry. If you thought this was a useful talk and would like to see me speak again, reach out to the leaders of our association, and let them know. It is always a privilege to speak at SAIA and with over 30 years in the industry, I have learned some things.
In the meantime, I would like to provide some valuable insight you might be able to use as you navigate your way forward with a scaffolding business.
There Has Been a Seismic Shift in Mergers and Acquisitions Affecting Scaffolding Companies
The selling of scaffolding companies (I’m focusing primarily on commercial scaffolding companies) has shifted significantly over the last 3-5 years. Prior to this period, the landscape of potential suitors had always consisted of a number of strong strategic and financial buyers that “understood” the ins and outs of scaffolding. At the end of your process, you would always have 3-4 buyers that understood the market and you weren’t stuck teaching them the scaffolding 101.
What happened to change all of this? Two words, Private. Equity. Over the last decade, private equity became involved with every major scaffolding company. As part of their involvement, they pushed aside the folks within the scaffolding companies that really understood the business. Part of this was tied to private equity folks falling in love with industrial scaffolding and its so-called “stability,” but that’s another article.
The M&A industry for commercial scaffolding companies was built on one universal pillar, “when all else fails, Safway will always be there to buy what you are selling at a fair price.” Safway was tough, but fair to deal with. They closed their M&A transactions, didn’t re-trade on terms, and weren’t unreasonable. And best of all, they understood commercial scaffolding better than anyone else.
But as all of you who are taking market share in the commercial space from what is now BrandSafway, know that they have moved away from many of their core principles that make a commercial branch successful. They are no longer the power purchaser in the scaffolding industry. They became owned by not one private equity group, but two private equity groups. To top it all off, the leadership from Brand (the survivors from the BrandSafway merger) has always had the mindset that “you can’t make money in commercial scaffolding” and they are doing their best to prove that to the marketplace (much to the benefit of their competitors in local markets).
Given that private equity is now a significant buyer in the scaffolding space, I have spent the last ten years trying to convince them that commercial scaffolding companies are great purchases, the problem is, I’m not getting any help (or very little) from my scaffolding owners/clients.
Rather than complain and fight an uphill battle, I thought I would give each of you the road map to make your scaffolding business more valuable and saleable. Because make no mistake, if you don’t take some of these suggestions and change your thinking, it’s highly likely that your business could be unsaleable at any price.
Normally, if I called a private equity buyer and described a business that had strong growth opportunities with 20-25% (or as high as 30%) EBITDA margins, I would have them jumping on a jet to come see me. In the commercial scaffolding industry, this is not the case. With your help, we can fix this.
The Pieces of the Puzzle
There are a number of key concepts that determine the success and value of your commercial scaffolding business. Understand that as I discuss these, they are all intertwined with each other to form a successful, valuable business. The concepts I will cover are:
1. Profitability is what matters, not revenue
2. Successful companies (branches) nearly always have superior managers
3. You attract the best managers through compensation or ownership
4. Data matters
5. Job mix matters, track it
6. Inventory – you need to be on top of it
7. Efficiency/process matters
8. Be a good competitor
Let’s take a look at the pieces
Like any pieces of a puzzle, they need to fit together to give you the full picture. The same holds true for figuring out how to build a successful/profitable/valuable scaffolding business.
I can often determine what the pieces look like by asking a scaffolding business owner certain questions. Their answers tell me a lot about how they view their business, how they run their business, what kind of competitor they are in their market, and what will eventually happen when it comes time to sell.
Let’s take a look at some of these “simple” questions and what I learn from the answers I get.
1. Profits, not Revenue. How big is your business? Admittedly, this is a very vague question and can be answered in many, many ways (revenue, profitability, branches, employees), but I almost always (I really could say “always” here) get the same answer. “We are a $__ million company.” I know the person is answering in revenue, but if I am feeling sassy, I might respond, “wow, that’s a lot of EBITDA you are generating,” knowing they will need to correct me. Anyone that’s heard me speak or read anything I’ve written knows one thing “REVENUE DOESN’T MEAN ANYTHING” (at least not in scaffolding businesses, or 95% of other businesses for that matter). If you are not running a biotech, SaaS, or similar business, revenue is pretty much meaningless.
2. Profitability. Let’s talk about what is important (EBITDA or cash flow) – they are not the same but for these purposes we will treat them as such. We are going to focus on EBITDA (earnings before interest, taxes, depreciation, and amortization). This makes it so it doesn’t matter how your business is taxed, how it is financed, or how you depreciate your equipment.
If you tell me a company’s revenue and EBITDA, I can tell you a lot about the business. I can tell you whether they are efficient, whether they have good systems, what their yard looks like, how they compensate their workers, what kind of work they focus on, and whether their company is going to be around or not (or is worth keeping around).
Scaffolding owners should be more concerned with how efficient they are in their operations and whether they make money/cash flow on a job rather than how much revenue the job produced.
You might see this on full display at the convention when the convention picks certain “Projects of the Year.” My question for each of those projects would be, did you make money on it? If not, why not? If you took it as a “loss leader,” will you have the courage and efficiency to charge enough next time or will the next similar job beat you up because it’s a “really cool” job. I have businesses that did really cool jobs (punchline: no buyers cared, all they asked was, “did it make money or lead to something that did?”).
3. Management Compensation. In all of my years in the scaffolding industry, there is one common thread that nearly every successful business (or branch in a larger organization) had and that is the quality of the branch managers. A manager will make or break a business or branch.
For purposes of this discussion, I am going to focus on multi-branch operations. A successful branch manager, if properly incentivized, will run a highly efficient location focused on safety, profitability, efficiency, and employee satisfaction (all things that sound pretty good).
What does “properly incentivized” mean? In nearly all cases, I have found that where branch managers are incentivized based on the profitability of the branch (which obviously must include safety) without limit, such a branch will consistently outperform other branches with other compensation systems. This can be accomplished through salary and bonus (for example, Safway would pay branch managers a certain percentage of operating profit without a cap) or can be done by granting or selling ownership in a branch to a particular manager.
This not only serves to attract the best managers and generate greater profitability, but it also acts to retain those managers. Taken one step further, this concept of basing compensation on profitability can be extended to other parts of the branch, including operations and sales. I believe every highly successful business/branch I have seen (EBITDA margins near 30%) have adopted some form of this compensation plan.
4. Customer Data. One of the biggest challenges when trying to sell a commercial scaffolding business is the project nature of the business. A financial buyer (being risk averse like many are) will often look at the fact that technically, each job is independent and there is no contractual obligation for that customer to continue to use the same scaffolding provider for the next job.
In many cases this is true, and no matter how many examples I would give to prospective buyers, my examples were often anecdotal and could be refuted. Let me give you an example: the first time we tried to sell Safway in 2002, they had revenue of around $300 million and something like 20 consecutive years of revenue growth, much of it in the form of “projects,” meaning not tied to contracts. We spoke with one financial buyer for whom this history was laid out, they asked, “so all of this could technically go away next year?”
I was floored. Sure, I guess (I mean if the world ended, but we would all have much bigger problems then). I’ve got the prior 20 years of experience showing that it won’t. The moral here is to collect data about your jobs, customers, customer relationships, longevity of jobs, backlogs (save at different periods so they can be compared), industries you work in, how you bill, anything you think is relevant.
When it comes time to sell, data is like gold and will help you squelch the concerns of buyers. One piece of data that is vital to collect is whether you are working on a new construction project, a repair, or refurbishment. Buyers care about this and it will help debunk the concerns that your business will “certainly” face a downturn when construction slows (we know from history, it doesn’t).
5. Commercial vs. Industrial Jobs. An important issue to consider in your business is whether you want to pursue industrial jobs. When I think of industrial jobs, I think of time and materials-based jobs vs. fixed cost jobs. Even though these industrial jobs often come with much lower margins, they create an air of stability.
Obviously, there are many other aspects that impact this decision but, if you have the opportunity, you should realize that buyers may look favorably on this part of your business, just as they do with repair/refurbishment jobs mentioned above. The industrial market is also typically larger and less localized than a given region’s commercial market, which offers further diversification from downturns and a better ability to entice buyers with growth/a larger addressable market.
6. Inventory. Another “mumble” question I often ask is “how is your inventory” or “when was the last time you took an inventory?” If you don’t know what a “mumble” question is, it is when you ask a question, and the answer comes back in the form of a mumble. You cannot run an efficient, profitable operation without having an accurate inventory, which means taking an inventory annually or at a minimum every two years.
In 35 years, I have never, ever seen a scaffolding owner have more equipment than they thought. Never. Now they have had less, sometimes 30-40% less than they expected. What do you think that does to your profitability or your return on capital? I realize many of you are saying “no way” when you read this but, yes way.
Look, if Safway could count their stuff annually with 90+ branches, you can count your stuff. If you sell your business and don’t know your inventory, you are very likely to get picked off by your buyer (and you probably should). Not knowing your inventory makes you look shady at worst and unprofessional at best. It matters and it costs you money. Figure out how to do it and get it done.
7. Efficiency and Process Matter. When operating your scaffolding business, you should have some consistent thoughts: “How can I turn common tasks into a process?” and “How can I increase the efficiency of those tasks and processes?”
Again, this bullet point could be a paper by itself, but let me try to capture some highlights here. Process matters because employees like consistency in the operations they perform – this will help retain staff. Process matters so that operations run smoothly even when key individuals may be out of the office. Efficiency turns into dollars, and into happier customers and employees. Ask yourself why you do things in a certain way. If the answer is “because that’s the way we’ve always done it,” you had better take a closer look. How do you load your trucks? How do you unload your trucks? How is your yard laid out? I could go on and on.
For someone who has walked through maybe 60 yards, I can tell instantly if the business is any good or not. A few years ago, I had the opportunity to walk through a yard that was recently taken over by a manager for whom I have a ton of respect and who really knows how to set up a yard. It was a real “before and after study” as I saw how he changed it over from the setup of the prior manager. That same day, I got to see another yard of a competitor. The differences were amazing. I could tell you right then which manager (group) would be most successful.
8. Be a Good Competitor. This may look like a strange one in a paper like this, but to a certain degree, we are all in this together. It doesn’t do anyone any good to go in and under bid a job by 30-40%. I get it, there are times when you just need to get some of your equipment out there earning some rent but try to be smart. I see it now in the industrial side of the business and a few examples show up in the commercial side. It is very easy for a single provider to pull prices down and it is often very difficult for them to recover. Obviously, competitors can’t collude to fix prices, but it doesn’t make sense in the long run to grossly under bid jobs.
As always, I am available to discuss any questions or thoughts you may have. I hope I get to address you in person again at a future SAIA convention. I realize it may seem like I pick on Safway at times, but to me they were the best-run scaffolding business for many years and I learned many of the positives about the business from them. As their operations have changed, I am able to observe the effect of those changes as well as how others who have adopted their old processes or methods have flourished, and I realize those processes were the right way to do things.
Thanks for your time if you got this far.
Sincerely,