Editorial: What Happens When the Music Stops?

by Kyle Clapham

Before I was required to write opinion articles like this one as part of my job, I did not think I was a worrier. But now, 20 years later, I know better. I tend to pick topics that address industry concerns, challenges and worries. This is one of those articles.

As most of you are aware, the word is out about the strong profitability of firms who operate in the replacement/home improvement segment of the remodeling industry. Outside investors are in the midst of a buying spree. Each passing month over the past two years has seemingly brought fresh acquisition news. Investment firms and private equity firms are scooping up dozens of leading companies on the Qualified Remodeler TOP 500.

A hearty congratulations goes out to the many longtime entrepreneurs—those who have toiled for decades to build strong, profitable companies—whose careers have perfectly culminated with lucrative buyouts. It’s the way it should be. It’s the American Dream.

What’s particularly gratifying to see is the number of medium-volume firms who have benefited as well. I am speaking of talented and engaged business owners like Bob Quillen, who built a $5 million-plus home improvement firm in rural Ohio. He received a strong offer and is now able to ride off into the sunset still in his 50s with plenty of opportunity to be a speaker, author and consultant.

Entrepreneurs in this industry now have a bona fide pathway to create a liquidity event. It will likely stay that way for the foreseeable future. Indeed, the word is out about the profitability of the home improvement business model—capable of dropping 9, 10, 12 or even 15 percent net profit year-after-year.

Another motivating factor for investors is the composition of the industry. It consists of very few national companies. It is a fragmented industry, ripe to be rolled up and quickly scaled with the aid of new business systems and technology.

This is the attractive upside of private equity. They provide the capital required to achieve amazing growth plans. But here’s the worry: This group of investors has only known abundant times. They are buying at the top of the market. Home improvements are in high demand by millions of homeowners. Their wallets are open.

What happens in an ordinary remodeling market with slightly less demand? That’s when investors and owners who are new to an industry might be tempted to embark on a round of cost-cutting. Would they dare take an axe to marketing budgets? That, of course, would not be advisable. Leads are life blood.

How will investors behave in a protracted downturn? Will experienced home improvement managers be able to convince their owners to continue to invest in marketing and advertising? Will boardroom compromises be made to keep steady profits flowing in the short run at the expense of long-term viability for their companies?

A worst-case scenario would be for investment buyers to get a bad taste and exit altogether. Their time horizon is critical. Are they in for the long haul? These are questions from someone who worries for a living. QR

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