Volume 7, Issue 11 - December 2006

Trend Tracker

Conversations with Buyers and Sellers 

by Michael Collins

The Association for Corporate Growth hosted its annual Capital Connection recently, a networking event where investment bankers and other intermediaries meet with private equity funds to discuss potential deals. This forum provided an excellent opportunity to assess the current appetite of private equity funds for investments in door and window companies. These and other recent conversations have confirmed the existence of a diverse group of potential acquirers and a group of owners desiring the sale of their companies. 

Buyers . . .
Twelve different private equity funds at the Capital Connection indicated an interest in investing in door or window companies. Many of these already own a company in the industry, while others are still searching for their first investment. These private equity funds are drawn to door and window companies for a number of reasons. Among these are generally low capital expenditure requirements, relatively strong average levels of cash flow and a certain degree of safety from overseas competition (although such competition is certainly emerging). The private equity funds with which we spoke at the Capital Connection together have hundreds of millions of dollars to invest. There are numerous other funds across the country that share an interest in this industry. These funds are awash in cash and they benefit from a very favorable lending environment, another critical aspect in completing acquisitions.

In addition to private equity funds, we have spoken to a number of owners of door and window companies that are actively seeking to acquire another company. Such buyers typically seek to acquire competitors that are somewhat smaller than themselves. Most often, the ideal acquisition target offers some overlapping products along with additional products not currently offered by the acquirer. Finally, the focus is generally on companies whose sales territories overlap or are very near the territory of the acquiring company. We have spoken to companies seeking acquisition targets from Maine to California and in every sector of the industry. The most common targets, though, are manufacturers of vinyl or specialty niche products and companies that focus on the replacement market. Serving the replacement market is seen as a valuable source of diversification for companies primarily engaged in the new construction market. 

. . . and Sellers
In working with companies in this industry, we have identified a great deal of potential business sale activity to satisfy the demand for acquisitions by private equity funds and strategic buyers. Recent calls to potential targets on behalf of prospective acquirers have uncovered strong interest in discussing a sale. The fact is that the owners of door and window companies as a group are a reflection of the larger demographic picture of the country. In short, many of them are approaching retirement or will do so in the next five years or so. Prospective sellers who are familiar with the typical desires of acquirers know that many buyers of companies will want the current owner and management team to remain with the business for a period of time. Often times, this transition period holds the possibility of bonuses based on post-sale performance–bonuses which are nicknamed the second “kick at the can” or “bite at the apple.”
Since selling a company is not a decision to be taken lightly, many owners entertain options to receive partial liquidity of the value of their companies. By taking advantage of mezzanine debt, an owner can receive, say, 20 percent of his company’s value, while still maintaining control of the business. Such a liquidity event allows an owner to carry out estate planning, purchase second homes and achieve other financial goals without the necessity of selling his company. 

We predict that industry consolidation will remain brisk, as active buyers encounter interested sellers in a market awash with cash for completing transactions. Owners in this industry, as well as others, have reported to us that they would prefer to initiate a sale now, rather than in five years when they perceive that an even larger group of owners desiring to sell will enter the market. Finally, business valuations are strong right now, providing an additional incentive to explore liquidity options. 

Michael Collins is with Jordan, Knauff & Company, an investment banking firm that specializes in the door and window industry. He may be reached at mcollins@jordanknauff.com.

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