Acquisition In Water And Sewerage Pipe Maintenance Space

ACQUISITION IN WATER AND SEWERAGE PIPE MAINTENANCE SPACE

Hey SF, 

I am looking at a deal in the Water and Sewerage Pipe Maintenance Space and wanted to check if anybody had any familiarity/expertise within the space? 

Target is a regional player with decent clientele, some contracted revenues, above-average industry margins (appx. 20%) based on seller discretionary earnings) and low debt. They also have underground electrical wires maintenance contracts (ISP /telcos) but that forms <15% of the revenues. 

One possible red flag for me was the lack of middle management in the company - CEO and COO are majority shareholders (both looking to exit for non-business reasons but COO is willing to stay on for 9-12 months) and both are very involved in the sales and tendering process. Also noticed the company is quite 'asset light' as most machinery and equipment is leased/hired as per the requirement of the projects. Is that normal?

What are the other major considerations / red flags to delve into during the initial due diligence process before getting an LOI out?  

Any thoughts or insights would be thoroughly appreciated.

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admin Massachusetts Institute of Technology - MIT Sloan School of Management Taylor University Stanford University - Graduate School of Business - 03/30/2021

Anonymous from INSEAD - Tagging a few Searchfunders who have commented on various water related businesses in the past and might be able to provide insight on water pipe/sewage pipe maintenance here:

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investor Universidade Católica Portuguesa - Catolica Lisbon School of Business and Economics - 03/31/2021

Would love to hear more. Have looked at a number of businesses in the space, feel free to reach out [redacted]

searcher Kansas State University University of New Orleans Rice University - Jesse H. Jones Graduate School of Business - 03/31/2021

Franchises are regulated in the US and some states. They are required to make disclosures to potential franchisees. The best thing to do is go through their funnel and see if you are a fit, and then get the FDD to start due diligence.

professional New York University - Leonard N. Stern School of Business James Madison University City University of New York, Bernard M. Baruch College - 03/31/2021

For all of the SBA lenders who responded, how does a sellers note affect the D/E ratio the SBA requires?

searcher Emory University - Goizueta Business School Florida Atlantic University - 03/31/2021

I don't have specific experience with this industry. But coming from a relatively flat engineering firm with[redacted]employees, you are spot on with your red flag for management. You need to be thinking about order winning criteria - if the firm wins work because the CEO/COO have built relationships and trust with key clients you need to have a solid plan for transition. As part of developing that plan, I would look at resumes and external relationships of the employees to see who can potential

searcher University of Texas at Austin University of San Diego - 03/31/2021

Something to consider is how you get bonding (meaning surety bonds... not transaction financing).... I've had a couple of broker conversations in adjacent spaces and this has come up as a potential roadblock for buyers. without experience in the space.

searcher Princeton University - 04/01/2021

I’m in the space in the US, although more on industrial purification services vs. municipal maintenance. From what I understand, that can be a good business (massive market, constant need for maintenance), but municipal work also tends to be competitive since they usually often post bids publicly to bid out. Asset light is pretty normal, since you can include all the leasing/contracting costs in your cost estimates to generate your bids. One thing to keep an eye out for—if there is m

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searcher Harvard University - Harvard Business School - 04/01/2021

Don’t mean to sound like a Debbie Downer (and this is merely my amateur two cents). As a searcher without significant industry experience, I would be extremely leery of buying ANY business where the 3 senior-most people are all leaving (COO staying for 9 months doesn’t change that). Having weak middle management is very common. Even MM PE firms run into that problem all the time, let alone small founder- or family-owned businesses that searchers tend to look at. I honestly don’

Oops, just realized you meant the top 2 are leaving not 3. So that’s not quite as extreme, though my suggestion of general caution remains. Make sure you have a thoughtful plan on how to replace two full-time owner-operators while you’re learning a new business, and make sure you have a back-up plan in case plan A fails. Certainly try to structure you deal with as much seller note / contingent payments as possible. Spend a lot of time in DD focusing on what the CEO and COO and everyb

ACQUISITION IN WATER AND SEWERAGE PIPE MAINTENANCE SPACE

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