Cleanlink News February 4 2010
M&A Status in the Building Services Industry
As written by GPA Inc, a building service industry consulting firm.
GPA continues to observe and feel the effects of the dismal economic climate, although we are beginning to see a glimmer of light at the end of the tunnel. Some media "experts" even say that the Recession of 2008/2009 has turned the corner. However, having turned the corner or not, many feel that the panic caused by the recession will have a long-lasting effect. Some even warn of a "double dip recession" yet to come. Let's hope not, but even the hint of this should be a warning that recovery does not necessarily mean "business as usual".
True to form, the building services industry has once again shown signs that it is recession resistant, but not recession proof. Contractors having customers that have been damaged by the recession have been affected accordingly, especially if there is concentration among its affected customers. Thankfully, that is not the case for most contractors.
The climate of uncertainty is having an effect on those in the industry. Should we grow? Should we sell? Should we acquire? Even if the answer is yes to the growth and acquisition questions, one has to think about how to grow and how to acquire in a climate where many banks can't or won't lend. Lines of credit have been slashed in some cases. We hear that this will begin to change soon. Of course, companies with little or no debt that have cash reserves are in a much better position. However, all companies, regardless of the debt and cash position, have to proceed carefully with regard to growth and or acquisition. This applies to any time, not just during a recession.
Selling one's company now can still be accomplished within the constraints of the financing limitations of a given buyer.
Generally, companies engaged in the building services industry have been under capitalized and tend to grow rapidly, which can be a formula for disaster, especially in the current economic climate. So, if you find yourself undercapitalized, proceed with growth very carefully, including any plan for acquisition.
The Recession of 2008/2009 and the ensuing period of panic and uncertainty has caused some prospective buyers and some prospective sellers to adopt a wait and see stance. This is not necessarily a bad stance. That is not to say that prospective buyers should not buy and that prospective sellers should not sell; it simply means that the usual caution should be observed and practiced and that, if the fit causes concern, go slowly until the concern is assuaged. However, keep in mind that there will always be some concern because there is always some element of risk for a buyer and seller. If structured properly, however, the risk to both can be minimal. If done for the right reason and diligence and common sense are applied to the process, acquisition of a company of the sale of one's company can work out well.
Banks' reluctance to lend has caused some qualified prospective buyers to not be able to proceed with their acquisition plans, but not all. GPA has concluded at least two transactions in recent months in which 75 percent of the required cash was provided by a bank. In each of these cases, the banks involved were smaller, regional banks. Because of the Federal Administration's urging, some of the larger banks may soon begin to lend again. It will take banks returning to meeting the borrowing needs of qualified companies for the small business community to regain the confidence lost. Our observations are that, generally, those companies that have maintained open communications with their banks about performance and strategic plans on a regular basis fare better than those that communicate only when there is a need.
Strategic buyers seem to be leading the way for acquisitions in the industry, but investor buyers too are taking a serious look at the industry, albeit, for companies that are producing a minimum of $1.5-$5M EBITDA. One of the GPA's recent transactions was completed as a joint venture between an investor and a strategic group. Such and alliance may prove to be an excellent strategy and one that may prove to work well for smaller transactions too. Solid, well-managed companies operating in good market areas and engaged in preferred market sectors are the primary targets for qualified buyers.
A few may seek "bargains," focusing on troubled companies. There may be a few more companies that are distressed now, but we at GPA don't necessarily agree that is a good strategy to buy a distressed company. Simply put, "one gets what one pays for." Of course, there are exceptions.
In summary, the Recession of 2008/2009 will be one to remember. It will likely prove to be an event that changes our strategic thinking and the way that business is conducted, at least in the short term. Businesses in all industries have learned invaluable lessons about survivability in this economic crisis. Shareholders of small business probably have greater application now for what may be their largest asset.
Those qualified shareholders or investors still interested in growing further will still look to acquisition as one means of development. Sellers too can expect good results.
Where do we go from here? Bruised a bit, business will move forward as it always has. Mergers and acquisitions will continue to be part of that forward movement. We've seen it during the recession (albeit, fewer) and expect to see it normalize as the economy fixes itself, which many seem to believe will be during the first two quarters of 2010, which, based on what many believe, the year of recovery.
