The Adviser’s View

Jason Fraler, Founder, Anchor Peabody

We find ourselves giving out the same advice over and over again these days: Don’t sell today unless you have to. This advice applies here.

During the boom times, this business probably traded at 3.5 times to 4.5 times adjusted EBITDA, or approximately $3.5 million to $4.5 million. Even if we never see those lofty EBITDA multiples in the future, if the business can improve and achieve around $2 million in EBITDA in several years, it will be worth almost $7 million at the low range (3.5 times)! Clearly, if the client can stick it out, we are going to recommend doing so. This always isn’t the case, of course.

The current market valuation for a profitable business this size is net book value plus some amount of good will. This business has a lot of things going for it: Management team, a diversified customer base (low customer concentrations), high-margin products for sale, a great position in a market with a lot of upside, and they’re right there with the business metrics.

What is working against this business is its historic performance. Even with the management adjustments, adding back in some one-time events that affected performance from 2004 to 2008, we feel this business has underperformed from a profitability standpoint. We like to see businesses that operate in this segment around 8.0%+ adjusted EBITDA, as we can make the case to potential buyers they are paying for a top performer.

We would push for a net book value deal plus another $1 million in good will paid via earn-out (additional cash paid over time, based on performance). Our argument would be (i) the client doesn’t have to sell, (ii) you can only sell your business once, and our client is selling at the bottom of the market, (iii) we ran a discounted cash flow (DCF) analysis on the business, and expect a buyer to make 5.0 times their money on the business at our valuation. For a variety of reasons — which we would share with the potential buyer — we feel a strategic buyer can afford to increase the purchase price to entice the current owner to sell and still make a sufficient return on investment.

We would also try and structure the deal a little differently. If the accounts receivable is not purchased, it adds risk to the client, as customers are less likely to pay you because they don’t need you anymore. Regarding the real estate, the hardest thing to come to an agreement on today is the value of real estate. We suggest including some language in the purchase option, which values the real estate via a third-party appraisal at time of purchase.

Without a doubt, the seller should run a competitive process to maximize this valuation. We agree with Scott: Parker Lumber may be one of the best groups out there to sell to. However, this does not mean they are the only game in town — especially in Southern California.

Anchor Peabody is a private equity investment and M&A/debt advisory firm that focuses exclusively on the building products and construction industry.