ToiletTalk Episode 4: Buying or Selling a Portable Sanitation Business

For this ToiletTalk, we interviewed Damon Powell from FMC Advisors. Damon talks about mergers and acquisitions so that you can maximize the value of your business when you want to sell it.


Matt: Hey, Matt here in the Service Corps studio. Today’s episode of Toilet Talk is all about buying or selling a portable sanitation business. Our guest is Damon Powell from FMC advisors. They have over 150 completed transactions under their belt and today Damon’s gonna share with you everything you need to know about buying or selling a portable sanitation business. Let’s get back in the booth and get this started.

Damon, welcome to the inside of our studio. What do you think?

Damon: I never would have guessed from the outside that it’s this big on the inside.

Matt: Yeah, we, we got it, made it really nice and roomy for everyone.

So thank you so much for being with us today. You know, this topic is one that I think is on a lot of people’s minds of, you know, mergers and acquisitions. There’s all sorts of words that get thrown around acronyms that get thrown around and I, yeah, I think there’s a lot of confusion and you bring a lot of clarity to that confusion. So thank you again for being here.

Damon: Absolutely and that’s, that’s why we started FMC advisors. You know, I saw over the years there was a lot of confusion and you know, we try to bring a real practical down to earth, you know, really make it as simple as we can for our clients.

Matt: Nice, nice. All right so we’re gonna start off by, you know, let’s cover the landscape here and demystify some of these, you know, terms that are being thrown around. So can you tell us, you know, what’s the difference between a strategic, regional or private equity you know, in this space?

Damon: Yeah, of course, the portable sanitation space has got very popular over the past few years, the strategics in the industry are basically United Site Services and United Rentals. They’re the quasi nationwide operators kind of below that is you’ve got some regional operators that you know, have multiple locations maybe across state lines. You know, some you know, have as many as 20 locations. You know, examples of those could be a Honey Bucket out west, a Blue Site Solutions in the Southeast, a Texas Outhouse in Texas. So you’ve got that level of operator out there that have grown by acquisition also. And then you’ve got private equity or other investment firms that are looking to get into the industry. And we’ve seen this across many industries over the past few years. Self Storage is another one, private equity got, got involved. So these are firms that have raised money specifically to buy companies in a certain industry, typically they’re going to like the owners to stay on because they don’t have the subject matter experts on how to run the business. But they like buying into the business, bringing some business savvy to it, help try to make it a little more profitable. And then some of those are going to want to sell that 3 to 5 years down the road and, you know, get the return back. And then kind of a fourth one is individual investors that have, may have been in the business before, maybe they’ve been in the solid waste business and they just like the industry, you know, they’re also kind of that fourth type of buyer that are looking to acquire companies in the portable sanitation space.

Matt: Nice. So thanks for clearing that part up and you know, the next part that usually comes after this is, you know, if I’m buying a business or I’m selling it, what’s it worth? And there is a not so secret formula out there that we could talk to the audience about to just set, set everyone’s minds at ease and make it easy. Can you tell us about that?

Damon: Yeah, absolutely. And you know, we all start businesses to, to create an income or a profit, right? And you’re going to hear the, you know, the term EBITDA but it’s, it’s all kind of a metric that if you are looking at different companies in different industries you can look at, you could compare the profitability of a solid waste company to portable sanitation, you know, a dry cleaner or a pizza place. It doesn’t matter what it is. You can work the financials to, if you’re looking at investing in some business where, is my investment going to do better? So, really what it is, it’s your top line revenue minus all your expenses and then a few adjustments in there and in our industry, a lot of times you’ve got what we call owner ad backs. Ok? And that may be if a new business is going to run, you run your company moving forward, you know, perhaps you’re paying yourself an above market rate. I’ll use an example if I’m running the company and I pay myself $150,000 a year. If I leave, you might be able to replace me with a operations manager that makes 80,000 a year. So there’s a savings there that would be an adjustment. So what we try to get to is that bottom line net income cash flow number that is very attractive to a potential new buyer. And one of the things most important when selling a business is working with someone like a CPA or someone like myself that have done this a lot that can work through your P and Ls for the past few years, profit and loss statements to really find out what that number is because the number that you pay taxes on a report to the IRS is not always that adjusted number that a new buyer is interested in. So, and then once we identify what that annual number is and you try to look for some trends, it’s great if it’s getting better every year, but we look at that number and then that’s what the multiple, if you hear multiples, it is a multiple of that annual EBITDA or annual adjusted net income that a potential buyer is going to offer you for your business.

One of the myths that we’ve had to dispel over the years is people hear multiples and they hear, they believe it’s a multiple of my revenue. Hey, I’m doing 2 million a year in revenue. I hear our businesses sell for five times. Is that five times my 2 million, my company’s worth $10 million. Well, sometimes we have to dispel that myth, with our clients. Now it’s a multiple of that annual earnings potential for your business.

Matt: Got it. Yeah, that’s, that makes it pretty clear. What are you seeing today for multiples for both, I think, you know, our audience, some folks have portables and they run a product line of dumpsters or whatever in those two camps.Where do you see the multiples today? And how do you see that changing maybe in the near future?

Damon: That’s a great question, Matt and at FMC advisors. We do have clients in both the roll-off solid waste space and portal sanitation. So we do stay up on the multiples. And then if your company is a mixture of both, you obviously, it can be you know, a mixture of those multiples. But typically, and I’m going to deal with companies in a million dollars in revenue or more, you know, all the way up to 20 million a year or more. You know, you’re seeing multiples in that 4 to 8 range and obviously that’s a huge range, but we’ll talk later in, in the spot here about what moves those multiples one way or another. But, you know, that’s a pretty typical range. And, you know, just for comparison, you know, the average multiple of all companies in the United States that sell is about six have and that’s every type of business all size. So, you know, we see, you know, our businesses kind of right in the middle, maybe a little lower depending on, you know, the type of business that you’re in. But, you know, that that’s what we’re seeing out there and, you know, what are we seeing going forward? You know, we’re in October 2022 right now. You know, there’s a lot of things going on in our economy in the world. You know, I think the general consensus is multiples are going to soften a little bit and one of the major factors in that is the cost of borrowing. So as the fed has raised interest interest rates, that makes it a greater cost to borrow. So anyone borrowing to buy your business is going to have a greater cost there. And you know, it’s, it’s just an age old adage that as interest rates go up, multiples have to soften a little bit.

That’s why we saw really high multiples over the past couple of years because interest rates were, you know, hovering around zero and you know, 2 to 3%. So the cost of tomorrow was cheap. But, you know, we are historically seeing the highest multiples that our industry has ever seen, even if it softens a little bit, it’s still a very strong multiple.

Matt: Got it. And is there a difference that you see between private equity or strategic, right, you know, in the last year or so,
Damon: You know, again, another great question and I think there’s so many factors that to answer that question, that it really gets down to your business and where you’re at. And quick example is, you know, if I’m a private equity company and there’s a lot out there trying to buy into our industry right now, you know, they may be looking at a specific area of the United States, they may be willing to pay up a little bit to get their first platform deal. And when I say platform, what that means is, you know, a platform acquisition is typically generating 2 to 5 million in annual earnings, not top-line revenue, 2 to 5 million in annual net income or earnings. And that is they call that a platform that I can get started with in the industry and then I can grow from there.

So you could see, you know, a private equity company paying a little higher multiple than a strategic, you know, right now to get into the industry. And we’ve seen that in a few areas across the United States, there’s been competition for the premier operators and I think that will be the case going forward, you know, really, as far as I can see because one of the misconceptions coming from other industries is private equity. They kind of believe that there’s hundreds of restroom operators in that platform category and they quickly find there’s not. So there’s good companies out there, good companies that really, you know, may not be for sale, but there’s some competition for those that I think will kind of keep the multiples for those premier companies at the higher end.

Matt: Got it. Thank you for answering that. So let’s, let’s think about it this way. There’s probably two camps of listeners right now. Ones that are looking buy a business and grow their service area and then ones that are looking to sell their business. So let’s start off first with, you know, if you’re looking to buy a business, what, you know, what are some of the pros and cons of that and talk about, you know, what those people should be looking for in those businesses?

Damon: Sure. I’d be happy to, you know, when we look at growing by acquisition or buying a company, you know, a couple of things come to my mind, it’s a faster growth. You know, if I’m buying a company that has eight trucks and, you know, 2000 units on the street, that’s a quicker growth. And if I try to do it organically and hire my own sales reps or maybe I’m the one out there trying to build a business.

So, you know, faster growth is, is one of the, the advantages, you know, two, you could expand your service area, you know, maybe you’re already established in, in, one spot you want to expand your service area because your clients are saying, hey, we love what you do in, you know, Raleigh, could you come over to Charlotte, right? So you could grow that way to really expand your service area, you know, and one is, you know, you, you grow, you can eliminate a competitor and sometimes that’s a good thing for a market. You know, I’ve been part of it on both sides that, you know, maybe you’ve got that and we, we see it in the, on the Facebook groups. There’s the low baller out there right. You know, why are they doing it for? Well, if someone comes in and buys that low baller, you know, it can help the entire market.

So those are three quick, you know, positives, I think about, you know, growing by acquisition and a fourth one I’ll throw in there is because the equipment has been so hard to source over the past couple of years, you may have a competitor that’s underutilizing equipment, they may have extra trucks or extra units that they don’t, they’re not utilizing.So that’s been a growth strategy that, that I’ve seen use. And you know, some of our clients have benefited from that over the past 12 months.

Matt: Great. And so, you know, those are some of the positives, but there’s also the buyer beware, what should they be looking for? And maybe I know you’ve got some good stories. Could you share a fun story of the buyer beware?

Damon: You know, I, I think one of the most important things in, in my career that I always look at is, is how is the fit, right? You hear about mergers and acquisitions all the time in other industries, right? Software and you know, lots of different industries. And I think they really view the fit. What’s the culture of my company versus the the company that I’m looking at buying.

So I think that’s important, you know, one quick one, you know, I was in a potential transaction where, you know, the buyer just felt that the level of service and the way that they had run their family-run company for a long time, they were looking at purchasing another company, you know, they just thought it was too much of a heavy lift to, to maybe change the mindset of that potential acquisition from, you know, we, we do ok, service and, you know, I think if you, when you walk the yard of a potential company, it tells you a lot about how they run their business and, you know, we can talk a little about this later. But, you know, yard organization, you know, if everything’s where it’s supposed to be, you know, you make a mental leap to how that, how they run their company. And I’ve got a really good client now where you go to the yard and there are lines painted on the, the black top and everything goes within a line and I walk into a company like that. I’m like, this is fantastic, right? That’s how, that’s how I ran my businesses. If you’re somewhere in between there that you just, there’s room over there, shove it in the corner. You know, people are going to make an assumption when they walk on there.

So back to my story, you know, the buyer did not go through the transaction because they just felt that the transition time and the leap from the culture of their company that was run like spotless to the one that was not as spotless, you know, it just didn’t work out. So there are times when just, you know, the appearance of your yard is can have a negative effect. So that’s one thing customer retention is another. I’m not gonna say, but I think you have to, to, to look at if I’m gonna buy a company, I want all the clients, I want all the customers. I want all the past customers. So I think you have to ask yourself, what is my plan to retain these clients? And if I don’t feel I’m gonna have a good customer attention, you know, that could be another red flag.

And not a quick story, I’ll be brief here. But you know, if you look at a company, you know, that company came in and took a lot of your clients for whatever reason, right? Maybe you don’t want those clients back. Maybe we’re the, they were the price jumpers anyway. So say, hey, Company A wants to sell it. It’d be nice. But if I buy those, if I buy my own, my old clients back, what am I getting? Are they just gonna leave it? So couple of things there that just keep in mind as you’re looking at potentially purchasing another provider.

Matt: Yeah, great points. I think one that stood out to me was the culture that you have. If you’re in a position to buy a business, you probably have a really good culture and processes in place. And so you have to think about, can this business that I’m purchasing? Can we fit it into our processes and into our culture? And if that’s not a good fit it, you know, you’re gonna be shoving things together that may not work very well for you in the future.

So along those lines, if you know, we switch camps, now we say, ok, if you’re a business that’s thinking about selling, and maybe you really do have great process and you have a great culture. I’ve heard you talk about the, the story that a business tells and that really plays into selling your business. Can we start there?

Damon: Of course now, and I’m passionate about what I do and that’s why I have so much fun. I’m glad you had me, had me on here. So it’s true, you know, a business is more than just the black and white numbers on the spreadsheet. We’ve talked about revenue and net income and adjusted EBITDA, right?But at the end of the day, there’s that piece of it. But there is the human aspect which I really enjoy about the portable sanitation and the solid waste industry, you know why people got into the business.

I think the story that we tell and how we work with our clients is we really become, we want, I want to become experts in their business really quick so that I can transfer that enthusiasm to potential new buyers, right? The story of how we got started where we are now what our plans are going forward and then even for, for the new buyers saying, OK, if you have greater resources, look where you could take it, you know, very common in our industry is, you know, I say mom and pop because that’s how that’s referred to. It’s not derogatory, it’s just and lots of industries refer to the smaller operators of mom and pop. They’re passionate about what they do. They work 80 to 100 hours a week and they can’t grow that business anymore, right? So by moving that to a potential new buyer, that buyer can then add more resources, maybe they add another line of business, maybe it’s temporary fence, maybe it’s storage.

So I think the story that you tell that we got from point A to point B where we are now and we see us getting to point C but this potential new buyer can help us get there. So I think that’s kind of when we talk about the story that there’s great stories to tell out there and businesses have a kind of a life of their own. And when you can portray that to potential new buyers and find the right fit because one of the things that are important to me at our company is the perfect exit for an owner and it’s different for everybody. And we don’t, we don’t assume what that is. One of my first questions is always how can I help? And then you know, what’s your exit look like? So and then we kind of tell the story to get to that next level about how do we best maximize the value for a client? And then, you know, how do we find the right buyer? Because, you know, in a lot of instances, I ask customers who is, you know, are there anybody that you do not want to, you don’t want to sell to? And is there anybody that you think we should?

So again, it all goes back to you take the numbers, you take the market area, you take, you know, the different lines of business and that’s all part of the story. So I think that’s kind of how, that’s what’s important, that’s what buyers are really looking for help us understand quickly the good, the bad and sometimes the ugly about a potential sale. And then, you know, you’ll hear me say a lot, the transactions happen when the timing and the value line up when I’ve got clients that, hey, I don’t want to sell right now, even if they offered me, you know, a room full of money because I’m, I’m loving growing my business. So timing and valuation line up a great story maximizes the value.

Matt: Got it. What if, you know, if you’re that business today that’s thinking about, I have an exit plan. I’ve been, you know, I’ve inherited this business for generations. I’m ready to pass it on and, you know, I’ve got it to a point where I’m ready to, to walk away. What are the things that they should be doing for their business and in their business to make it more attractive? We’ll start there and then we’ll move on to what are the things they should clean up if they’re doing that may not make it as attractive.

Damon: And one of the things is, in our industry is just run a great business, right? You’re in it. We are a service business. There’s a rental component and sometimes there’s a disconnect that people think this is a rental business. It’s a service business with a rental component. Number one is just run a great business. The best that you can with the resources that you have. So I think that’s first and foremost, and that will in itself make itself attractive. You know, I think it’s John Wooden, the famous basketball coach for UCLA said, you know, he really never looked at what his competitor was doing. He says, if I focus on what I’m supposed to do on our offense, you know, we will be unstoppable. We’ll let the competitors spend their time figuring out how they’re going to compete with me. So I think if you, there’s, there’s plenty of truth to that.

So I think if you do that and run a great business that helps, you know, and then it’s, having solid financials, right? You know, and Quickbooks is fine, you know, for the smaller operators out there, Quickbooks is fine, you know, 95% of the people who use Quickbooks, everybody’s familiar with it. So that’s good. So keep solid financials, you know, that’s fine. I think that’s very important.

I would say invest in, in equipment as much as it’s financially possible for you. The benefits beyond just having good equipment is less downtime, less customer service interruptions. And, you know, I spent 10 years at waste management, really learning the, the ins and outs of business and people underestimate the cost of downtime of having the truck down the number of calls it creates and the number of customer service interruptions.

So I think investing in equipment as much as you can having solid processes and a software system such as ServiceCore. Again, not just to say I have it but the time savings that are sometimes hard to quantify. So I think that certainly helps. So, you know, investing in the business equipment software. Yeah, I think those are pretty solid ones.

I mean, again, have, again, you don’t have to have a company handbook that’s this thick but, you know, have a, have a position description for each, each for, for my, you know, yard person, you know, you know, for my service tech, whatever it is and it helps your business. But at the same time when I have clients that I can walk in and they just hand it all out to you. I’m like, ok, this is, this is gonna be a whole lot easier and fun. And again, it kind of goes to that story that, you know, you’re buying an ongoing concern. You’re not buying a fixer-upper, right? There’s, there’s those out there too, there’s fixer upper businesses just like there’s fixer-upper houses and that’s ok. There’s homes for them. We sell them too. We just find the right buyer and, you know, we don’t portray it for anything more or less than it is.

So, I think that could get, you know, a fair number of, of what to do to just, you know, make your bid and growth, you know, trying to have some growth, you know, you know, when, when the graphs are going up into the right for sales and earnings, it always helps. Your, your next question may be, you know, what, what could hurt evaluation and it’s, you know, if, you know the sales are going down and, and we’ve seen those two and, we get to that in a minute, but I’ll have you any follow ups with the the, the positives or how’s that?

Matt: Yeah, it’s great. I think there’s, if you were to walk into a business and ask the owner or the ops manager, hey, tell me about this and they can rattle off details without, I don’t, I’m not sure. Or if you get a lot of those things about their financials, about their process, about what they’re seeing, you’re using tools to help you see those trends in your business, like that’s going to make a world of difference versus someone that has reams of paper behind them and they don’t understand their process. So, I think it’s pretty clear that if you have a good business and then I think also the culture probably plays in that too. You could feel it walking into a business. If the people there that you may be buying, you know, that business that come along with it, you want them to be happy. So if that’s already in place. That’s, you’re not looking uphill, for buying that business.

So, all right. Yeah, let’s switch to the cons part because I think that, no judgment zone here, but people do things with their business and they put things in the books that maybe they should think about taking off before selling that business. And you talk about some of the cons, that that people can clean up.

Damon: Of course, I want to mention one more thing before we jump out of that, that, you know, in my 20 years in this business, you know, I have seen the the sanitation industry get more and more professional every year over the past 10 years and pricing integrity raising rates for the past 10 years. It’s been very encouraging. So I think that’s why some of the private equity individual investors are getting on board with our industry. So I just want to say that and again, a plug for the Portable Sanitation Association that I think they’ve played a real role in that. And if you’re not a PSAI member, you really need to look into that because there’s tremendous value to membership and what they bring. So, you know, I think that’s helped our industry and I want to make sure I mentioned that.

Yeah, so, so moving on to, to, you know, what may not make my business as potentially valuable as it could be. I’ll throw a couple out there. And, you know, I think putting all your eggs in one basket, you know, we’ve all heard that, you know, if you are a company that focuses solely on residential home builders, that may be great for you and you may have tremendous success, but lack of diversity in your revenue is going to make a potential buyer leery or, you know, maybe not pay up to the highest multiple for your company because they want a sustainable business that has some diversity in the revenue.

So what I would say is take a look at your client list and a lot of times you’re so busy running your business. You know, you don’t have time to do that. But you know, and you could even there’s plenty of consultants in our industry. You know, my company FMC Advisors does the same thing, but look at your revenue, you know, if you’re all commercial construction, sprinkle some events or some residential construction or industrial or agriculture in there because the buyer wants to see some diversity. Now, it doesn’t have to be 10% of 10 different segments, but I think you want to have some diversity. So number one, I would say, don’t put all your eggs in one basket and that’s from a market segment standpoint.

You know, you also want to look at your your top 10, you know what percentage of my revenue is generated by my top 10 customers and maybe some, some, maybe you never look at that. I think you should. And I think there’s, you know, depending on the size of your business. I wouldn’t want more than 50% of my work coming from 10 clients. I’d like to see it as a buyer less than 33%. Now again, it’s fine to have large, very profitable clients. Absolutely. But I just think taking a look at that, it, there are times when that can be detrimental to your, your multiple. So I think that from a revenue standpoint.

Number two is, is equipment. If you have older equipment that has not been maintained, a buyer is gonna say, what do I have to spend in my first year of ownership if I buy this company? If you’re running 10 trucks and I have to replace five in year one, that’s 100 and $535,000 per truck. So they’ve got to spend, what, 650,000 on trucks in year one, that’s basically going to be a deduction from your purchase price because they know in year one they have to go and spend a boatload of money. So it kind of goes back to spending as much as you can fiscally responsibly on equipment. So, if you’ve got a fleet and I’ve seen these not so much anymore, we’ve had some good years, but for a long time, you know, I would look at a company in 2007 internationals were the last trucks they bought because that was right before the global financial crisis and they have not turned them along. You know, now we’re 15 years removed from that. So it’s not that bad, but, you know, look at your equipment, the role stock for sure. You know, you can change out your portable restrooms. It’s not as important as your rolling stock because that’s the high dollar and that’s the high-cost item.

So I think those two things, you know, looking at where your revenue is coming from, you know, making sure that, you know, now again, I’ll throw a caveat here because if you knew you were going to sell in three years, maybe you run that equipment right up to that last day and you say, I know I’m not going to get the most for my company and the way I kind of tell people is sometimes when you sell your company, it’s not the entire ice cream Sunday at the end of dinner. It’s just the cherry on top of the Sunday, your business has made you money over the years. It may not be that windfall at the end that you thought it was going to be, but it’s gonna be something right now. There are larger operators where in it, it is a windfall, you know, it can be, you know, not just the Sunday but whole Thanksgiving dinner and the trip to.

So I think, you know, there’s a couple of things there that I would look at if I’m an operator, that could lower my valuation.

Matt: Awesome. Well, this has been a really great conversation. Last thoughts that you want to leave our, our audience with that may be both on the buying and the selling side. What do you want them to take away?

Damon: Just have a plan, right? Whether, whether it’s selling in the next 12 months or the next 3 to 5 years, understand that it’s a process and, you know, the average company in the United States can take up to a year to sell, you know, we haven’t seen that in the portable sanitation industry, transactions have taken a shorter time. The ones that I’ve, I’ve been a part of but just have a plan there, you know, on the sell side and the same on the buy side and don’t be afraid to reach out to consultants in the industry. You know, there’s, there’s a lot in our industry that know what they’re talking about, you know, consultations are always free with my company and it’s just good to talk to people in the industry. So network with other people, you know, I see in the Facebook groups, I see in the PSAI, so, you know, I just think that don’t be afraid to reach out you know, there’s no silly questions. You know, there’s just opportunities. Matt: Awesome. Well, thank you so much, Damon. It’s been a pleasure talking to you today and I know our audience got a lot out of it.

Damon: Well, same here, Matt. I really appreciate what ServiceCore is doing. So, again, thank you again for the opportunity.

About the Author: Liam Sabot

Liam is an author of over 70 articles about portable toilet rental, septic pumping, and dumpster business management. He is dedicated to providing important information to help sanitation businesses succeed.
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