Following my blog post “7 Things to Consider When Selling Your Scaffolding Business”, I received a number of inquiries about what buyers look for and value in a scaffolding business. There are many factors a buyer considers depending on their overall acquisition strategy and current circumstances. These include:
When I say “location”, I don’t mean whether your business is located near an interstate (which also might be important). What I am referring to is your geographic location (what city or region of the country are you located). Unfortunately, there is not much you can do about this, but it plays a role in determining which acquirers might be interested in your business. Large national providers may be looking to round out a geography while individual buyers may be most interested in a business close to their home.
2. Quality of Management
A primary driver of success in the scaffolding industry is the quality of the management team, or the manager in a branch setting. The old saying "a good manager will figure it out, while a bad manager will figure out how to screw it up" is certainly true here, and buyers are willing to pay up for good managers. The good manager may be the owner or an employee. If you have good management, buyers will pay a premium (and spend significant time prior to closing figuring out how to keep the talented manager in place post transaction).
3. Customer Relationships
A buyer will figure out who in the target organization owns the key customer relationships and will take steps to make sure that person, or people, stay with the business following a transaction. This might be accomplished through non-compete agreements, a continued investment in the business following a sale, or structuring part of the purchase price in the form of an earn-out. The reason here should be obvious – if a buyer acquires a scaffolding business and the person who owns the key customer relationships leaves, the buyer is left with a pile of equipment and fewer customers. Certainly, not what the buyer bargained for.
A buyer will be interested in the quality, quantity, and type of equipment the seller has. What shape is the equipment in? Is the quantity of equipment the same as what is represented in the financial statements? Does the equipment match what the buyer already has? These are all critical questions to establishing and holding value. Buyers are often looking for sellers with like-kind equipment. While this is certainly a plus, it is not fatal if you have a different style of equipment. Sellers often lose value when they are not certain about the amount of equipment they have. A failure to properly account for equipment and keep an accurate inventory often result in the seller forfeiting a part of the purchase price.
In a business defined by safety, a target’s safety record could influence its value. Scaffolding companies depend on safety to attract customers and employees. A failure to have a strong safety record can cost a seller purchase price or a transaction altogether.
6. Union vs. Non-Union
Like location, there is not much a seller can do about its union status, but it will be a critical element on how the business will be viewed and whether some buyers will be interested at all.
7. Revenue/Customer Concentration
A buyer will look closely at a seller’s customer concentration. Said differently, a seller will be concerned if more than 20% of a customer’s revenue comes from a single customer or a single job. A buyer will take added time to understand the strength of that particular customer relationship prior to moving forward. A buyer will also be interested in any one-time jobs, which may skew a seller’s performance.
8. Revenue Mix
A buyer may have a specific interest in the seller’s revenue mix. The amount of a seller’s historical revenue from sales, straight rental, and erection and dismantle will be considered when valuing a seller.
These are a few of the specific items a buyer examines when evaluating a scaffolding company. Within each of these broad categories are many subtleties, but this should help a seller understand the broad valuation areas.