Waste Today’s Corporate Growth Conference, which took place Nov. 18-19, 2019 in Chicago, kicked off with an opening keynote from Laurel Mountain Partners’ Managing Director Jeff Kendall. Kendall, who has decades of experience building, buying and selling companies across the waste and environmental services sector, shared his insights on what it takes to build valuable companies that are subsequently attractive to buyers in a session titled, “Strategies to maximize the value of your business.”
According to Kendall, there are eight criteria that companies with high value share.
They have a great safety record
According to Kendall, success in the waste industry starts with safety. He notes that enforcing strict safety protocols trickles down to every facet of the company.
“A great safety program is a must. I think that seems obvious,” Kendall says. “It’s really the most important thing you can do. So, why is it that important? Well, first of all, we all want our workers to go home in the same condition they came in—it’s just the right thing to do. It’s a dangerous, difficult industry in this business and focusing on safety is clearly the right thing to do, but also good safety practices are consistent with good operating practices.”
He notes that enforcing safety is not just important for protecting workers, it’s imperative for a company’s bottom line since accidents can lead to worker’s comp claims, equipment damage, higher liability insurance and lower staff morale.
For those companies struggling with safety, Kendall recommends getting a third party to come in, such as one’s insurance company, to audit operations. He says that not only are these companies able to offer a fresh perspective, they are often eager to do so to protect against potential losses.
"I know pushing price can be nerve-racking. ... But if you look at the national [players], they’re pushing price.” –Jeff Kendall, managing director, Laurel Mountain Partners
They have high free cash flow and regular and consistent growth in EBITDA and margins
Kendall says that beyond safety, having high free cash flow is a cornerstone of a healthy waste business.
“What we’ve discovered over the years is that if you have less than a 20 percent EBITDA margin, you’re really running a company that’s not sustainable over the long term. Particularly if you have some debt, you’re not going to have enough free cash flow to truly maintain your operation,” he says. “It then becomes a slippery slope—the longer you’re in business, the older your equipment gets, the more difficult it gets to finance and the lower your margins become. It’s not exact, but getting above that 20 percent margin begins to give you a sustainable cash flow and a sustainable business.”
Kendall says that generating high free cash flow is especially important for those businesses that may be considering a sale.
“If you’re selling and you’re talking to any of the sophisticated buyers, they’re going to ‘present value’ your free cash flow, and they’re going to look at it post a reasonable capital expenditure (cap ex),” Kendall says. “So, when they’re present valuing it and you have a low margin, you have normal cap ex, you’re not going to get nearly as much value for selling that business. And frankly, bankers are going to look at the same criteria because they are concerned about it.”
For businesses looking at how to achieve high free cash flow, Kendall says pushing price is key.
“I know pushing price can be nerve-racking,” he says. “You’re in a market, you have competitors, you think if you raise prices too much, they’re going to steal your customers. But if you look at the national [players], they’re pushing price. They have found that when you push price, you don’t actually lose that many customers and your business becomes more sustainable. And frankly, when you think about it, this business is a tough business—it requires a lot of capital, a lot of hard work and you deserve to get paid well. We use to have a mathematical calculation of sorts we relied on [at Laurel Mountain Partners] that said if you raise prices by 10 percent, and you lose 20 percent of your business, you’re better off than you were before, so you can’t be shy about doing that.”
They have a sustainable and defensible position in the market
Kendall says that a sustainable and defensible position in the market is critical for helping a company bolster its value. This comes down to having sustainable cash flow and revenue as well as diversified offerings.
Kendall gave an example of a waste company only offering temporary roll-off service. He says that this type of company can suddenly go from profitable to vulnerable in the blink of an eye when faced with an economic downturn or new competition that can knock margins down quickly.
“Being a pure temporary roll-off can be a good business, but you’re not going to create as high value, nor is it as financeable, as a business that has a greater mixture of commercial and residential business,” he says.
He notes that integrated businesses that include assets such as landfills, transfer stations and hauling operations are the most stable, as these diverse business streams keep companies from having to rely on outside entities for collection, processing or disposal.
“One thing you want to try to avoid is having a high percentage of your business with brokers,” he says. “There are a lot of brokers out there, and it’s hard to be in business anywhere without doing some business with them. But if you have a high percentage of your business with brokers, that’s going to be viewed negatively, especially by the national [companies] if they’re looking to purchase you. … There’s not a lot of value there because you’re not controlling your cash flow in those instances.”
Beyond having diverse offerings, Kendall advocates getting customers under multiyear contracts to help buffer against the threat of competition. He also stresses the importance of having low customer concentration so that businesses aren’t vulnerable once existing contracts come to an end.
“Bankers are going to look at businesses that have high customer concentration and say, ‘What if [something changes]?’ and this is going to lessen their borrowing ability or they are going to have lower value,” he says.
They have quality equipment
In talking about the importance of having quality equipment, Kendall shared a story of meeting with a smaller waste company that he eventually acquired. The owner of the company had recently invested in a fleet of new front load trucks that appeared immaculately maintained. When Kendall asked about why it was that the company made such a significant investment, the man responded with, “Our job is to go out and service the customers, not to worry about getting the equipment out or running a maintenance or service shop.”
Kendall says that investing intelligently in equipment can benefit a company’s cash flow, maintenance expenses and worker morale, which ultimately can help elevate a business and ensure more efficient operations.
They take maintenance seriously
Similar to the importance of investing in quality equipment, Kendall says, is ensuring a company has a quality maintenance program in place.
“When you walk into an in-house maintenance shop, you pretty much know everything about a company,” he says. “If the shop is a mess, if it’s unorganized, there is a lot of excess stuff laying around, there’s a vehicle graveyard in back, it’s going to tell you the equipment is probably not well-maintained, it’s probably old, it’s probably out of service a lot, and the company probably has a lousy safety and service record—you can tell right away.”
He says like safety, focusing on proper maintenance just takes a concerted effort from within the company. He notes that enforcing pre- and post-trip inspections, as well as running a second-shift service crew to address issues in the evenings to limit vehicle downtime, are a couple best practices that can make a big difference. Insisting on proper maintenance practices can also result in happier and more engaged drivers who take pride and accountability in their vehicle and their work, Kendall says.
They have low turnover and a well-compensated workforce
Elaborating on the importance of happy employees, Kendall says that low turnover is one of the markers of a well-run workforce. Conversely, he says that constant change can have ramifications that spread throughout a company.
“When you have high turnover, you’re going to have a negative correlation with safety, with maintenance, with customer service and with damage to your equipment,” he says. “It’s really critical to get your personnel working together with you, making suggestions, helping and being engaged with your safety program.”
To help recruit and retain quality employees, Kendall says appropriate compensation is a must. He says that paying employees well, having good benefits and a 401(k) program when possible can “pay for itself” over time by boosting productivity and cutting back on retention issues that cost a company money.
They use technology appropriately
New technology is being utilized every day in waste applications to improve vehicle performance, offer better monitoring solutions, and capture data that is able to be leveraged by managers. The key, Kendall says, is making sure this type of information can be easily digested and acted upon by a company’s workers.
“You have to get data that’s actionable,” he says. “You don’t want to get information that you’re not really going to use. You don’t want to inundate your managers with information they don’t really need or question them about things that don’t really help [your business]. There are just so many tools out there, that [if you’re able to use and understand them], you let bankers or buyers know that you are keeping a close eye on your business and you are sophisticated about how you’re running it, and that creates real value.”
They adopt the proper corporate structure
The last thing that Kendall says companies should know about instilling value lies in how the company is structured.
“If you are a C corp and you’re looking to sell, you’re probably reducing your value by 10 to 20 percent,” he says. “When a company goes to buy you, they want to buy a LLC or another pass-through entity, an entity where they can mark up the assets and they can get in goodwill that’s depreciable, but there are variety of other tax and structure reasons why buyers don’t want to buy a C corp. You don’t want to set up [a corporate structure] that has no true value in this industry, and an LLC provides you the same protection a C corp does.”
Putting it all together
In closing, Kendall notes that while his list of best practices isn’t exhaustive, it creates a blueprint companies can copy to reinvigorate their businesses and instill greater value.
“If you’re a company that has a great safety program and good results, if you’re a company that has high free cash flow and consistent growth in your EBITDA margins, if you’re pushing price, if your company has contracts and no large concentration of any particular customer, if your company has good equipment that’s well-maintained, you have low turnover and a well-compensated workforce, if you’re using technology appropriately and you have a good structure, you are going to have a valuable company and you’re going to be eminently financeable,” he says. “You’re going to grow nicely, you’re going to keep good workers, you’re going to have great morale and you’re going to build something of great value.”