In a post-pandemic landscape, business as usual looks a little different, and the restoration industry is not exempt from these changes. Despite the unforeseen nature of 2020, mergers and acquisitions continue to play a significant role in maintaining a healthy, growing market through 2021.
It is important to understand mergers and acquisitions are not just impacting the restoration space; M&A is up across the board. According to Statista, as of June of this year, there had been nearly 600 transactions valued at more than one billion dollars in the last year, and the overall number of M&A deals from July 1, 2020 to June 30, 2021, was up 19% from the year prior. As a little aside, the largest M&A deal of all time as of January of this year was the acquisition of Time Warner by American Online for $164.7 billion.
The mid-2021 update from PwC (PricewaterhouseCoopers) says M&A is picking up again as business leaders become more confident in the economic recovery and the lifting of uncertainties surrounding the pandemic. In fact, the 2021 PwC Global CEO Survey found 76% of CEOs expect global economic growth to improve in the next 12 months.
According to the PwC update, “Macroeconomic indicators, including positive GDP rates and high consumer price industry rates, promise growth – further whetting the appetite for mergers and acquisitions.”
Deals revolving around technology and innovation are among the most sought-after, and private equity firms (which have obviously taken a keen interest in the restoration industry) have found fundraising even easier as of late, holding about $1.9 trillion in buying power.
While we won’t dive into it in this article, also be on the lookout for the rise of new, special purpose acquisition companies (SPACs). By PwC’s last count of almost 400 of them, they hold about half a trillion dollars in “combined cash and leverage expressly earmarked for future deal-making.”
For private equity to show interest in an industry, they want to see clear growth potential over the next few years. With an increase in natural disasters and property damage, the restoration industry has caught their eye. Here are a few examples in the last few years of private equity’s interest in our industry:
- American Securities acquired BELFOR Property Restoration (2019)
- Two private equity firms acquired BluSky (2021)
- Blackstone acquired SERVPRO (2019)
- FirstService Corporation acquired Interstate and First Onsite (2019)
- Incline Equity Partners acquired Jon-Don (2021)
- Harvest Partners acquired Dwyer Group (2018)
- TSG Consumer Partners invested in ATI (2021)
- Bessemer Investors acquired stake in Legacy Restoration (2021)
Still, just because M&A is up and PE is showing interest doesn’t always mean there are people looking to sell in any given industry. In restoration, specifically, we can pinpoint some key reasons business owners are willing to sell or consolidate – and much of it has to do with demographics of our industry today.
The Restoration Market Today
As a restoration specialist for the past 15 years, I’ve witnessed the shifts—significant and otherwise—in our industry, and as I reflect over the activity of the past months, I see a call for growth and change that is being answered in exciting ways.
In our niche market, much of the data attached to business owner demographics is skewed and influenced by an aging business owner population.
According to a recent report by the International Business Association, with 65% of all restoration owners identifying as baby boomers and seeking retirement over the next decade, future planning is now a necessary and pressing issue. The boomer generation will include individuals who are 60+ years old by 2024, and the time for passing the mantle to new ownership is approaching quickly.
With 80% of their wealth locked into their businesses, a successful sale means the difference between comfortable retirement with opportunity to pursue new interests and a less savory exit scenario.
Statistically, 70% of these businesses will have less-than- desirable traits that make selling a challenge or even impossible, and as an exit becomes imminent and options are limited, businesses falter. With growing demand in the restoration space, it’s important to identify the gap between today’s sellers and maintaining industry growth. The answer may just lie in dependence upon new opportunity in mergers and acquisitions.
So how do we keep the industry moving forward? Beginning with the desired exit result in mind, we work our way back to identify gaps and problem spaces. I work with restoration business owners daily as they plan their exit strategies and take steps to establish a sellable business.
With an aging population and a vast majority of owners having no exit plan in place, the sellable businesses in the restoration space are in the minority. Family business transfer diminishes with each generation. Thirty percent of companies transfer to the second generation, but less than 12% make it to the third, and without a plan for correction, the industry is facing future crisis with fewer Millennials and Generation Z workers taking interest in restoration.
The news is not all bleak, however. From 2020 to 2021, the owners who presented a sellable business saw sale prices increase 12% on average as private equity and roll-up players took an active part in mergers and acquisitions.
The trend is expected to continue in 2022 for larger companies, as the smaller business sales margins stabilize. The important distinction in these promising numbers is the sellable state of the business. When owners equip themselves with the proper exit strategy and prime their business for success, the numbers don’t lie—profitability increases as does the potential for the best possible sale of the business.
The solution to the aging business owner population is a promising one, and the positive results have played out in the marketplace in 2021. When the business is sellable, the industry is seeing private equity, large industry players and new wealth investors entering the market and acquiring businesses at what I consider a healthy, sustainable pace. Of course with this comes the need for independent contractors to continue to grow, innovate, and serve to stay competitive.
Looking ahead, 2022 must be a year for striking balance between current business health and the incoming capital available through new investors. As an industry, we can work together to improve the health of current businesses and forge new relationships and opportunities.
There are many directions this conversation can go, such as learning to be competitive in our marketplace, giving purpose to our businesses to in turn attract future generations of restorers, and ensuring every owner has a clear exit strategy in place to avoid unwanted surprises or transitional emergencies.
The conversation on M&A has been going for several years now, and I anticipate that trend to continue into the coming years. Whether you want to keep your company in the family, or are looking to sell soon, the more owners understand the landscape of the property damage restoration landscape, the better they can make informed decisions and plan for the future.
When we understand the numbers, we can affect positive change and continue healthy collaborations to bring health and longevity to our industry.