The roofing contractors who become our exit planning customers often ask, “Should I consider an outside sale of my company?” And my response is always the same: “It depends on your personal, business, legacy, and financial goals.” The answer is complicated but as simple as aligning your goals.

In November 2023’s RC eMagazine, I wrote a piece titled “Your Sale Options in a ‘Roofing Exit”; check it out for a birds-eye view of your selling options. This column is devoted to an overview of an outside sale to a competitor or private equity, what companies make attractive targets, the overall marketplace, and the sales process. 

Many owners receive weekly calls from private equity, or PE, firms or their representatives interested in buying commercial or residential roofing companies. Still, before you sign any agreements or provide financial information — only to find yourself negotiating with one limited opportunity — take a beat; do not sign anything yet.

My immediate advice is to take a deep breath and strategically consider your goals. Then, if you want to sell, find a professional to represent your company and go to the market to attract multiple buyers, higher offers, and the most attractive suitor.

The Buyers

Roofing consolidators have been in the market for more than 20 years, and now we have regional roofing companies and PE active in the marketplace. Why? They see an attractive, profitable, fragmented, stable market — ripe for longer-term growth investors. 

The consolidation attraction is an opportunity to provide an economy of scale and synergies for purchasing shared resources, best practices, and bargaining power to be more competitive. 

PE noticed during COVID-19 that the demand for roof maintenance, repair, and replacement continued. Roofing contractors are attractive to PE. Why? Simply, most money on roofing is spent within the repair and replacement space, approximately 80%, and not on new construction, which makes up the balance. That translates to reoccurring revenues, even during a recession.  

Ideal Target Companies

PE companies are “financial buyers,” investors who build value and sell later at a higher price. As investors and not contractors, private equity invests and purchases controlling interest, usually 60%-70%, and often needs owners to remain and manage the company to increase value. 

These owners can later sell their remaining portion for a “second bite of the apple” and a more significant multiple and be wholly cashed out. Every company’s unique culture and attributes will reveal its salability and value. 

Here are some attributes of ideal target companies:

• Profitable, sustainable earnings that determine the best-of-class contractors.

• Good margins (10%+ EBITDA)

• Pattern of growth and strong EBITDA in the trailing 12 months up to the purchase date.

• Clean and, preferably, audited financial statements.

• Free of potential liability.

• Seasoned professional management with retention bonuses.

• In-place performing management systems such as an EOS (Entrepreneurial Operating System).

• Recurring revenues from solid maintenance, repair, and roof replacement programs.

Getting Your ‘House’ in Order

The sales process typically takes between eight and 12 months, but before then, it is a wise move to make sure your ducks are in a row. In other words, make sure your accounting is transparent, your receivables are in order, and your expenses are clearly defined. 

Messy books require more work to parse, which often means more due diligence from a prospective buyer. That increased due diligence can have a negative impact on the valuation of your company. You wouldn’t sell your home or car without making sure each is clean. The same goes for your contracting firm. 

Here are a few points to keep in mind: 

• Clean up every aspect of the business to make it “sale-ready.”

• Complete a company valuation, tax strategy, after-tax value, and minimal sales price floor.

• Create an Offering Memorandum and go to market.

• Narrow down offers through LOI (Letter of Intent) and then initiate negotiations with the chosen buyer — the percentage of ownership, future owner involvement, etc.

• Complete the buyer’s due diligence to finalize the purchase and sale agreement.

• Sales closing and new ownership.

• The owner loses financial and strategic control at the sale but has operational influence and holds the remaining stock value for the next sale.

Before the COVID-19 pandemic, most roofing exits were management buyouts. This exit is still popular for owners wanting to sell internally to management and family over eight to 10 years. The entry of PE has provided more selling opportunities to commercial and residential contractors who wish to cash out, take some chips off the table, and move into retirement.

Remember, cashing out will be the largest financial transaction of your lifetime. Do not react to a buyer, but instead, have a strategic financial plan to align your personal, business, and financial life. Attract multiple buyers and a plan to reduce or eliminate exit taxes — that can easily exceed 55%.