Growing interest in roofing companies: consolidation continues

From a quiet niche without acquisitions to a consolidating sector

Three years ago, from the Construction & Real Estate sector team, we held our first conversation with a roofing contractor who was considering selling his business to an investor. At that time, the construction sector was generally seen by strategic buyers as unattractive, because it is cyclical, project-based and more erratic than the sectors private equity investors were used to. The process was therefore deliberately put on hold. Two years later we went to market with this roofing company and the interest was overwhelming. What had changed in the intervening period turned out to be the beginning of a structural shift.

In a short period of time, three private equity (PE) parties entered the market with a clear buy-and-build strategy: HC Partners built a national platform via West Friesland Dakbedekkingen and Hoekdak and Dakvisie, Foreman Capital did the same via DAKaccent, and 819 Capital Partners acquired Viruma. Rembrandt M&A even supported a total of four transactions in this market in less than a year. In addition to these three parties, Trill Impact, Bencis, MSQ, Batavorum Capital and Qeyinvest are also active in the sector, each with their own acquisition strategy and focus. By now there is hardly a roofing contractor in the Netherlands who has not already been approached by an investor or who is not already thinking about it themselves.

What attracted these PE parties is easy to explain. The roofing sector combines characteristics that are scarce for investors:

• a fragmented market;
• stable demand with limited sensitivity to a recession;
• a tight labour market in which acquisitions are the fastest route to capacity growth;
• a sustainability challenge that guarantees structural demand growth for years;
• direct value creation for PE parties that already have a participation, through the realisation of synergy benefits.

Strategic buyers also acquire companies, but it is mainly the PE parties that are currently determining the market. They deliberately follow each other: whoever sees something moving in a market acts quickly. We know that pattern from the installation sector, where consolidation started in one specific niche and gradually broadened to adjacent disciplines. We expect the same here: platforms that have started in flat roofs will in time add pitched roofs and façade work to their activities, ultimately becoming a one-stop-shop building envelope company.

In addition, the size of the sector plays a role that many entrepreneurs underestimate. There are only around 3,000 roofing contractors in the Netherlands, of which only a small group meets the criteria set by buyers. Precisely because the supply of high-quality acquisition targets is limited, competition among investors for those companies is high. That works in the seller's favour, but only as long as he is in the picture in good time and goes through a professional process.

In addition to the various PE platforms, strategic buyers are also active. The logic of a strategic buyer differs fundamentally from that of PE: a strategic party integrates your company into its own organisation and generally expects you to remain involved in the coming years. PE more often asks a seller to reinvest in the platform, so that you share in the growth of the group.

Which type of buyer suits you best depends on what you want. This could be, for example, the maximum price, a fast process, preservation of the company culture, or rather a new role within a larger whole.

What determines the value of your roofing company?

Entrepreneurs who are considering a sale generally estimate their company value on the basis of turnover or reputation. Buyers think differently. Based on the transactions that Rembrandt M&A supported, these are the five factors that largely determine the price.

1.  Staff in permanent employment
This is the most decisive factor. In the whole of the Netherlands there are only around 3,000 roofers. Companies with their own skilled professionals on the payroll are therefore scarce. Own staff in permanent employment creates a mutual dependency and that is exactly what a buyer wants to see. The more people in permanent employment, the stronger the proposition and the higher the valuation. Joining a larger organisation moreover offers those people more prospects for training, advancement and long-term commitment. That is something an independent company can increasingly less easily offer on its own.

2.  Renovation over new build
New build is cyclical. With renovation that is different; a roof that leaks has to be repaired, regardless of the economic situation. Moreover, renovation increasingly coincides with sustainability improvements. Thicker insulation layers are now mandatory in renovation. Companies with a strong renovation portfolio are therefore structurally valued more highly.

3.  The right B2B customers with the highest possible recurrence
One housing association as a customer delivers dozens or hundreds of roofs in one go with one point of contact. (Semi-)Governments and real estate owners are the most valuable customers, associations come next, followed by contractors. Private individuals are the least interesting for a buyer: a lot of communication, little volume and no guarantee of repeat business.

4.  Multi-year maintenance contracts
Maintenance contracts are relatively small in absolute turnover, but disproportionately valuable. It creates stable, predictable turnover. Long-term contracts with housing associations or property managers considerably increase the quality and predictability of the cash flow.

5.  A company that can also run without the owner
If all customer contact, professional knowledge and decision-making run via the owner, there is a strong degree of dependency. Anyone considering a sale would do well to invest in succession and deputy management in good time.

A concrete lower limit for what buyers find interesting is difficult to establish. Profitability weighs more heavily than turnover: a smaller company with good margins and its own staff can be more interesting than a larger company that leans heavily on self-employed contractors or is too dependent on the owner.

What buyers pay depends strongly on the type of transaction. In a platform transaction, in which a PE party makes a first acquisition in the sector, multiples are structurally higher than in add-on transactions in which an existing platform adds a further company. The difference can be considerable. That is an additional reason to be in the picture in good time: those who sell while the market is still building up do so in better circumstances than those who wait until the platforms have already been fully formed.

Are you an interesting acquisition target?

This question is most useful to ask in good time, but in practice entrepreneurs often do not ask themselves this in time. Not every roofing contractor can sell his company, at least not under the current, favourable market conditions. The combination of own staff, renovation focus, stable B2B customers and recurring turnover largely determines whether a proposition is strong enough to interest buyers.

Is your company not yet ready for it? Then it is wiser to make targeted adjustments over the coming years, instead of entering a sale process and ultimately coming unstuck. Are you considering a sale process? First sit down with an adviser who knows the sector. That conversation does not always have to end in a decision to sell; it can also end with two or three concrete actions for the coming years, such as taking on more renovation work, concluding a long-term maintenance contract or ensuring management that can run independently. But in any case start with that conversation. Because without it you will never know where you stand, which type of buyer would be interested and what you can improve to achieve a stronger negotiating position.

At one of the roofing companies we recently supported, we saw this in practice. Even before the decision to sell was final, we indicated which elements could be worked on. This preparation improved profitability and made the company more attractive as an acquisition target. The transaction that ultimately came about was significantly better than a transaction that would have been achieved without that preparation.

The life after the deal: reinvest or exit?

PE parties in this sector are less likely to ask for a classic earn-out. What is more often requested is that the selling entrepreneur reinvests in the platform; a minority interest that benefits from the growth of the group. The logic behind this is that the buyer thereby obtains certainty that the entrepreneur will ensure continuity. That certainty also increases the value of the company.

A quick and full exit is of course also possible, but you often pay the price for this in a lower valuation and stricter conditions. Those who are willing to remain involved generally achieve a better overall result.

Many entrepreneurs are pleasantly surprised by what disappears after a sale. One buyer expects you to remain active for several years, while another gives you free rein relatively quickly. But in both cases, what most owner-managers find most burdensome disappears: the day-to-day burden of HR, finance, administration and IT. The larger organisations take over these matters. You have realised the financial value of your company and are free to do what you originally became an entrepreneur for. Those who are commercially strong retain that role within the group. If you prefer preparing cost estimates or simply working on the roof, you can continue to do so. Those who are good managers may be given a role on the board of the larger platform. Your involvement will be shaped in the way that suits you best.

Will the consolidation wave continue for long?

Consolidation in the construction sector has only been active in its current form for a few years. The market is sufficiently fragmented for it to continue for years, but the window will not remain open forever. Platforms are growing and, in time, broadening their focus: from flat roofs to pitched roofs, cladding and ultimately window frames. But the sector’s limited size also means that the best companies are found quickly. Those who wait too long will sell in a market that has changed further in the meantime.

This shift illustrates how quickly market dynamics change. The entrepreneur who was sceptical three years ago now sees what they have missed. Those who have their company well organised today are selling under conditions the roofing sector has rarely experienced. The question is therefore not whether this window will close, but whether you are ready when the moment arises.

About the author

Huib Wesselman van Helmond is a Senior Consultant at Rembrandt M&A and a specialist in the Construction & Real Estate sector. From Rembrandt M&A, he supported four transactions in the roofing sector in less than a year, including the sale of West Friesland Dakbedekkingen to HC Partners, the acquisition of Hoekdak by HC Partners and the sale of Viruma to 819 Capital Partners.