NEW ORLEANS — Home improvement pros who attended the recent TOP 500 LIVE conference hosted by Qualified Remodeler seemed to revel in the opportunity to connect face-to-face for the first time in many months. But that did not fully explain the jubilant mood among the crowd, which was due to very strong sales activity nationwide.
Attendees reported that money is flowing into their companies at record levels, enabling them to expand and grow in ways not previously envisioned. Indeed, the unprecedented 2020-2021 bull market for professional home improvements has given many owners and executives a sense that the industry’s stock is rising perhaps permanently, and that the value of their companies is rising in the process.
Evidence of this rise in value is found in the growing interest in home improvement companies from outside investors, including private equity companies. That interest has fueled an unprecedented spate of acquisitions in recent months. Rising values and multiples were also a topic of conversation. This also added to the positive vibe at TOP 500 LIVE.
For example, a side conversation among three home-improvement company owners is typical of the degree to which consolidation is on the minds of most industry players. Over a quick lunch, the three owners speculated about recent valuations. They even did the math on what their companies might be worth. All three were smiling like they bought Bitcoin in 2012 and had kept it.
Their positivity is not unrealistic. The acquisition surge has delivered somewhat unexpected paydays for owners of big and small companies alike. Big firms include Mad City Windows of Madison, Wisconsin, and Statewide Remodeling of Dallas, which were acquired by Titan Home Improvement for undisclosed sums in 2019 and 2020. An example of a smaller or medium-size firm is Quillen Brothers, based in Bryan, Ohio, which was acquired by Leaf Home in May.
Until recently there were only two main exit options for home improvement owners. Most simply close their businesses at retirement. Others use bank debt to engineer a sale to company managers or family members. Today, a third option is emerging. There’s the prospect of an outside chance at a cash offer driven by a market for well-managed companies. The growing awareness of that new market is sending positive mojo coast-to-coast. At the same time, word is out that only companies with consistent profits are getting offers.
Bob Quillen, who built a highly profitable $5 million window company in rural northwest Ohio, said the sale of his company happened very fast once his broker forwarded his company’s financials to the firm that eventually acquired Quillen Brothers, Akron-based Leaf Home. Evidence of profitability also sped up the process, Quillen said. He could not release additional details of the transaction.
Originally a gutter protection company, Leaf Home has grown spectacularly in recent years to more than 140 wholly owned locations around the U.S. Lately it has expanded its offering and is splitting into four distinct business units and expanding into windows and baths via a new entity called Leaf Home Enhancements.
Consolidation Drivers and Outlook
Nobody knows for certain how long the consolidation trend will last, but conventional wisdom suggests it is just getting started. The remodeling and home improvement market is incredibly fragmented for its size, which is estimated to be more than $400 billion annually. Qualified Remodeler’s ranking of large firms, the TOP 500, add up to $13 billion in activity, or approximately 3.3 percent of the estimated market. By contrast, the top 100 home builders are responsible for 50 percent of annual new-home sales. For this reason and others, B.J. Werzyn, founder and owner of West Shore Home, is among those who see the surge in consolidation as just getting started.
Since 2018, his firm has completed eight acquisitions, the most recent being Skyline Windows of Richmond, Virginia, on Nov. 8. (See the full list on page 30.) West Shore is also investing in organic growth by launching new branches around the country. Today, the company operates 27 locations in 12 states primarily offering replacement windows and one-day bath renovations.
Werzyn spoke at TOP 500 LIVE and participated in a panel discussion alongside leaders from other large companies. When asked his opinion of the percentage of the industry that is ripe for acquisition, Werzyn did not offer a percentage but affirmed that his company intended to stay active as a buyer.
“As it applies to West Shore Home, we remain uniquely positioned for growth on the national level,” Werzyn said. “This is based on several factors including our technology platform, which allows us to capture and interpret large amounts of data each day, our scientific approach to marketing and our strong focus on recruiting the best talent in the market.”
With big investments in technology, the company has built repeatable systems and processes and a scalable platform that has been critical to its growth. When a company is acquired by West Shore, the result is an immediate cost savings in accounting, lead management and marketing.
West Shore has also created an admirable leadership development system as well as a culture of accountability among its team members. This is due in large part to its three-year partnership with Echelon Front, a leadership training consultancy.
Amid a business environment where finding and developing capable managers is the No.1 impediment to growth, West Shore is continually developing new leaders capable of stepping in and running new branches. These new leaders have been trained in part by retired Navy Seal Team commander, Jocko Willink, the keynote speaker for TOP 500 LIVE and founder of Echelon Front. Willink has authored several books on leadership and entrepreneurship, most notably Extreme Ownership: How U.S. Navy Seals Lead and Win. Willink’s overriding message is that everyone in an organization, top to bottom, must be a leader.
“We were lucky to partner with Jocko when we did three years ago,” Werzyn said. “He’s gotten so big recently that I doubt he would be available to work with us at this point.”
According to individuals familiar with previous West Shore acquisitions, the combination of a technology-based scalable system, strong finances and a proven method for developing leaders has enabled the company to assimilate new companies quickly. Acquired companies can transition to fully fledged West Shore branches in 60 days.
West Shore, in a statement, said it does not comment on its finances as it relates to acquisitions, but it reportedly funds its acquisitions through a combination of sources. It does so with the assistance of a full-time acquisitions director, Andrea Hayden, who joined the firm a year ago.
In addition to West Shore Home, a handful of other firms have emerged as active buyers and leaders of the consolidation trend. They include previously mentioned Titan Home Improvement based in Fort Lauderdale, Florida, which is partnered with York Capital. Ohio-based Leaf Home is also an active buyer. A fourth player, private-equity firm Huron Capital Partners, entered the market in 2017.
With the help of Detroit-based broker Angle Advisors, it purchased 1 (800) Hansons, a top 20 firm founded by Brian Elias. Huron owns and operates Hanson to this day and has made one additional acquisition to complement Hansons. Observers close to Huron have said the private equity firm intends to buy more companies and to incorporate them into the Hansons brand.
Daniel Gluck, CEO of Titan Home Improvement, did not attend TOP 500 LIVE; but in a brief Zoom interview last month, he said the company is actively looking for companies to buy and is in advanced talks with others.
Titan was created in 2019 with financial backing from York Capital to acquire well-run home improvement operators. Gluck was a managing director at York Capital in 2018 when he began to learn of the potential investment opportunity in home improvement. That interest, he said, was fueled by a number of “macro tailwinds” favorable to the home improvement industry. Specifically, he cited more people staying in their homes for longer, an aging housing stock, homeowners staying in their homes longer and low interest rates.
“I also saw that the marketing for quick-turn home improvements was really starting to grow and have an impact,” Gluck said. Home improvement “was growing faster than GDP. It was less cyclical than new-home construction during the last downturn. Plus, these are businesses with many levers for growth.
“An owner can choose to generate more leads in the market it serves for the existing product suite it offers,” he added. “An owner can also open new greenfield locations. You can roll out new products. And it’s a very fragmented industry with lots of aging founders who never thought they’d have a real way to exit their business.”
Having researched the industry, Gluck, a Miami resident, in June 2018 reached out to Mel Feinberg owner of Fort Lauderdale-based FHIA Remodeling. Gluck drove 45 minutes up I-95 to meet him, and they hit it off. FHIA soon became Titan’s first home improvement acquisition, which was followed by Dallas-based Statewide Remodeling, Mad City and then Paradise Home Improvement. At that point, Gluck jumped in with both feet by forming Titan and running it full-time as CEO.
“I was probably one of the few senior private-equity professionals that had no designs on running a private equity fund,” Gluck said of his move to Titan. “I wanted to run a real operating company, so I left York to take over as the full-time CEO of Titan. Since then, we’ve done four more acquisitions. We have several others under LOI (letter of intent) to purchase, and the business is growing like crazy.”
In 2020, Titan generated $322.8 million in revenue on 22,101 jobs. The company expects to hit $438 million this year.
Relationships and industry connections have been deciding factors in many of these transactions. It was Mel Feinberg’s connection to Statewide’s Rob Levin that facilitated Titan’s second transaction. Owners vouch for one another, and they explore options together.
The same can be said of at least four of Leaf Home’s acquisitions. Back in February 2021, Leaf Home made a big splash by announcing three acquisitions on the same day, and all appear to have been relationship driven. They acquired Thiel’s Home Solutions in Ashland, Ohio and Storm Tight Windows in Deerfield Beach, Florida, as well as Miracle Windows & Showers of Jacksonville, Florida.
Gary Fanelli (who along with his brother Bill own manufacturer Conservation Windows) was the seller of Miracle Windows & Showers. He also owned Storm Tight Windows of Houston, which was later acquired by Leaf Home as well. Gary Fanelli was the connection to Storm Tight of Florida owner Lee Brown. He was also the connection to Bob Quillen, who sold his firm to Leaf Home in May.
Deal Frameworks and a Year-End Push
Several company owners who recently sold or who are in the process of finding a buyer were interviewed for this story. Each asked not to be quoted due to current and pending agreements that preclude them from discussing specific transactions. They agreed to be interviewed on background to describe the various approaches to structuring a potential sale. They also described the valuation process in terms of multiples of profit, also known as earnings before interest, taxes, depreciation and amortization, or EBITDA.
Profitability and EBITDA are key starting points in any transaction. A company with top-line revenue of $16 million and EBITDA of $1 million may be less valuable to a buyer than a company with $5 million in top-line revenue and $1 million in EBITDA.
Another factor is the number of product lines sold by a home improvement company. A window-only company or one that sells just one product is less valuable to certain buyers than companies that sell two or more products. Prices for companies are often expressed in multiples of EBITDA. The range is four times EBITDA on up to a seven multiple for companies with excellent net profit margins and who sell multiple home improvement products.
How well a company fits within an acquiring company’s strategy is also a critical factor. If there is indeed a race to the top, to be the first company to operate coast-to-coast under one brand, then the service area of a target company—its footprint—can be the key driver of price.
Several large deals are expected to be announced by the end of 2021, driven by the desire to take advantage of historically low capital gains tax rates, or the tax paid on the sale of an asset. Presently the top bracket for long-term capital gains is 20 percent for individuals and 21 percent for corporations. Historically, this number has been as high as 35 percent for corporations and 28 percent for individuals. It is anticipated that this rate may move higher in 2022, and this is creating an urgency to get deals done this year.
Backlogs have emerged as negative factors in some cases. Some investors look at a big base of uninstalled volume as a liability. Other factors include a company’s online reputation as well as the strength of its ratings and reviews.
Owners attending TOP 500 LIVE had good reason to be in a celebratory mood. Business is good, and there are higher expectations for what their companies might ultimately fetch in an active marketplace. But much of the conversation about pricing multiples is highly speculative and often incorrect. At this point, very few people know the specifics of how the deals are being priced, but it is accurate to say that there is a very broad range.
The HIP 200 list this year has been altered by the absence of firms that have been acquired. And it has been changed by the quick rise of fast-growing firms that will undoubtedly continue to grow dynamically in 2022 as the race to the top continues. QR