Chair of JMBM's Corporate Department, Bill Capps, spoke at the 2010 CalCIMA Annual Education Conference. Below is a summary of his presentation:
There are three features of building materials companies that make them especially problematic from the standpoint of buyers and sellers. The first is volatility—susceptibility to economic fluctuations. Many companies are probably doing half the volume they have done in the past and even that with decreased pricing. The second is public disapproval towards the industry. When building materials companies are seeking entitlements from local jurisdictions, they are often in for a fight. The third feature is the time line building materials companies are forced to adopt in planning their businesses. Owners and managers of these businesses must be alert to problems which could surface many decades in the future, in a changed regulatory environment.
Special issues for buyers and sellers:
Permitting issues. A number of different agencies control permits vital to the operation of the business, requiring the examination of several jurisdictions when trying to determine if a business is in compliance with its permits. Environmental concerns. Building materials companies directly touch water quality, air quality, traffic congestion and other environmental concerns to a greater extent than many other industries.
Reclamation deficiencies. It is possible for huge liabilities to develop over a long period of time. Operators may find themselves trying to quickly fix a problem that may have developed over a very long time period.
Unexpected tax obligations. Unfortunately, there are few legal limits on the ability of local jurisdictions to impose or raise non-property taxes on mining operations. This means that the buyer must take into account the possibility that taxes will be increased without any corresponding benefit. Coupled with the immovable nature of these operations, it is clear that this is a risk factor to be taken into account.
How companies are valued and how to affect these values:
There are several ways to get a building materials company in shape for a sale, including: examining and verifying entitlements; analyzing burdensome (or helpful) supplier and customer contracts; getting commitment from important executives and employees; analyzing and solving environmental and other liability issues, and rationalizing financial statements.
It is important to remember that the purpose of due diligence from the standpoint of a buyer is not merely to determine whether or not there are problems which prevent the purchase of the business. The buyer wants to find problems in the business which the seller is not aware of since these serve to legitimize the re-negotiation (downward) of the purchase price. Therefore, any significant problem unknown or unidentified by the buyer ends up being to the seller’s advantage.
Other factors influenced by the seller:
Assessing multi-year averages is key to understanding the value of the business because of the volatility of the market place. Cash flow value v. asset or reserve value will be important since a sale on cash flow value today is likely to be a discounted sale. The seller has to focus on the asset value instead. In an engineering firm, for example, the talent in place has a great value even if the financial results are poor because any one who is trying to recreate the business will have difficulty assembling the talent.