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Despite concerns that COVID-related impacts could slow merger and acquisition activity through 2021, demand for attractive waste companies kept pace in the first half of the year.
Moderated by Bert Rosica, managing director of AE Rosica & Co., a WasteExpo session on June 30th entitled “Understanding your company’s evaluation” presented the panelists Rob Michalik, Managing Partner at Kinderhook Industries; Joe Cassin, vice president of business development for Waste Management; and Mike Teplitsky, partner at Wynnchurch Capital.
The panel discussion focused on parameters that affect valuation, what companies look for when valuing companies, and how potential sellers can maximize value when they come to the table.
According to Michalik, a company’s management infrastructure is critical to assessing value.
“For us as financial investors, we look at the team,” he says. “To the [platform acquisitions], we want to have the right team to grow the business. Management skills and the leaders within an organization are the most important things to us when looking to buy a company. Ultimately, we are looking for a team to build the company. There is no great company that doesn’t have great employees. We have learned over time that we have been successful because our management team has a great strategy and a rhythm and a rhythm for how they run a business, and they are successful at it. ”
In addition to a strong team, Michalik looks for growth opportunities in the company’s market when assessing an acquisition.
“We want to see the possibility of a medium-sized company with sales of 20 to 50 million over a 5-year time horizon,” he adds.
Cassin says that the waste management industry, as the largest player in the solid waste space, has a number of defined criteria that are taken into account when evaluating companies for potential acquisitions.
“As a strategic buyer, we’re looking for well-run companies with good equipment that’s not yet 15 or 20 years old, and we’re looking for a good, reliable customer base and cash flow with long-term contracts and decent margins. With Waste Management’s presence across North America, many of our deals are viewed as “tuck-ins” so we can eliminate a lot of back office workers and derive a lot of synergies from them [our deals],” he says.
Michalik says that when researching a company, “the quality of earnings begins with the quality of the customers” and that the waste a company manages is its most important asset. To control this waste, companies need to offer good service at a fair price, he notes.
Given the operational hazards pervading the solid waste sector, Michalik says companies with good safety records have a significant head start when analyzing what to buy.
“The interesting thing about waste management at the moment is that the insurance premiums are going through the roof. Workers, medics, collisions – all of these bonuses keep rising. … The Independents are being hammered, so security protocols are vital, ”he says.
Michalik says that for every store the company buys, they install it on “day one” when they don’t have a camera system in their trucks to improve training and accountability while reducing liability.
Teplitsky, who shares experience with investing in legacy equipment manufacturers, says the systems and equipment a company has are some of the key things Wynnchurch Capital researches before investing. He also says that contrary to popular belief, private equity firms often try to invest money in a company rather than lowering costs in order to add value.
“Private equity has a reputation for joining a company and saving costs,” he says. “The reality is that when we get involved we often roll out new systems and tools and hire new people as we increase investments.”
Because of the complex nature of a company’s due diligence, Cassin says, business owners can speed the process up by lining up their ducks before they get in touch with a potential candidate. He says owners should get organized and find an experienced business lawyer who can guide them through the process.
In discussing what owners should know about maximizing value, Michalik says that sellers should be willing to invest in the company for the greatest return.
“Before a sale, entrepreneurs often think, ‘Gosh, I don’t want to spend on a new software package or device because I’m going to sell it.’ My advice is that whenever you are preparing for a sale, you should always run your business the way you want to own it. … If you are happy with your business and don’t care if you sell it, you have a better chance of selling it. If you haven’t invested enough and suddenly stick with it, you get pretty scared, ”he says.
Teplitsky says it is important to come to the table with a review and that review should be carefully researched.
“You have to find out what your real rating is. You have to talk to people, get advice, and find out [if what you are hoping to get] is realistic. Most deals die because of [discrepancies] when evaluating, ”says Teplitsky.
Rosica ended the session with parting advice for those considering selling.
“The expectations of the sellers have to match the market realities. If they’re not coordinated, now is not the time to sell, ”he says.