When current or potential clients call me to discuss the current general acquisition market or specifically about selling their business, I typically first explain the macro vs. micro aspects of acquisitions within the rental industry.
The macro facet relates to how the current market is performing as a whole: are there active buyers out there; is the capital available for acquisitions; are fair prices being paid to sellers; will there be any interest (hopefully from multiple buyers) for the client’s business?
The micro aspect relates to the trends of the specific company; has revenue and cash flow grown or declined in the recent 12 to 24 months; has the client invested in inventory and infrastructure to keep the business competitive; who are the key employees, what are their roles and capabilities and how will they react to a potential acquisition?
These details are only the tip of the iceberg of what an acquirer will want to fully understand before considering whether that company is the best use of their investment capital. Let’s take a look at the past 12 to 18 months and how recent events have affected and continue to affect current and future outlooks within the equipment rental Industry.
2020 in Review
To understand the macro impact on the market, we must develop some better perspective of recent events. In February 2020 at the annual Rental Show, RER editor Michael Roth and I discussed writing an article regarding the current market of mergers and acquisition activity within the equipment rental industry. The previous year 2019 had been a record year for our industry, with the total construction and industrial rental market in the U.S. estimated at nearly $39 billion (according to ARA Rentalytics) after several years of solid growth. Overall, 2020 confidently appeared to be on-track record year for both rental revenue growth and strong acquisition demand.
As the deadline approached for my article in March of 2020, COVID-19 threw most everything into extreme uncertainty; states and entire regions began to shut down business activity of most every sector except those deemed “Essential.” All business across the board were scrambling to determine whether they met the “essential business” designation and if they would manage to continue operations.
A prime example is Durante Rentals, one of the nation’s largest independent rental companies in the Northeast, which announced the company would shut down temporarily, as it found itself literally at the epicenter of one of the hardest hit areas of the country: the New York City metro area. (Durante Rentals re-opened after a short period of closing.)
Another example of impact is one of my clients who had just signed a Letter of Intent with an acquirer, with the due diligence process set to begin in late March of 2020 with the arrival of an on-site accounting team. Just a few days before the team’s arrival, the accounting firm announced that it had suspended all employee travel and the entire deal was put on an indefinite “hold.”
Then, shortly thereafter, consistent and major acquisition player Sunbelt Rentals announced it was suspending all M&A activities until further notice. In sum, the high levels of uncertainty in the overall global business and capital markets caused major pause, leaving rental business owners bracing for another 2008-style downturn.
Surprisingly, unless they were at or near one of the epicenters, most independent rental equipment businesses showed only a marginal downturn in the second quarter of 2020. My aforementioned client who was under LOI showed only a 5 percent to 10 percent downturn in March and April of 2020 (versus 2019), with a relatively flat May and June, followed by a record month (best ever) in July 2020. Actually, by mid-to-late summer of 2020, most of my clients persisted in the overall +/- 5 percent range of rental revenues versus 2019. Panic expressed in the March/April period had been replaced by cautious optimism by the end of June.
While larger acquisitive companies such as Sunbelt and United remained on the sidelines, we saw several private equity groups jumping into the fray. Eberhart Capital, Hunter Street Partners and Borgman Capital all announced the acquisition of independent rental companies and by year-end 2020 another of our clients, RER 100 company Champion Rentals, was acquired by HERC Rentals, a major player that had long been dormant in the post-recession acquisition market.
Current situation 2021
Now, as we fast forward to the present middle of Q2 of 2021, it seems the tables have turned. Most every publicly traded rental company: HERC, H&E, Ashtead/Sunbelt and United Rentals have all held investor calls expressing optimism about the outlook for the remainder of 2021 and into next year 2022. All have also outlined growth plans calling for a combination of acquisitions and green-field starts. Used equipment prices have been strong, fueling steady confidence and the availability of funding provided by asset-based lenders as well as investors. In addition to the major strategic acquirers, the prior mentioned private equity groups, along with at least one other major financial investor (who has two unannounced acquisitions) have expressed an interest in continued acquisitions within the industry. Another group to consider is strong regional players, such as Rental Equipment Investment Corp. (REIC), that has continued interest in pursuing acquisitions. In general, the current macro situation looks confident for rental business owners looking at a sale: the overall rental industry outlook is positive, the capital is available and there are capable and active buyers ready to take a look.
What it means for the independent rental business owner
Over the years, one of the most frustrating things for me as a facilitator of transactions is timing. The ideal situation requires the market to be “ripe” (such as it is now) and for the business to be performing well at the same time. I’ve had clients perform very well in the 2008 to 2010 timeframe but, there were no buyers at the time. On the flip side, I’ve had businesses approached by interested acquirers but, company revenues or cash flows had dropped and/or the company was experiencing some other internal issue at the time, making any possible transaction difficult.
Every business has generally gone through a trying time, a downturn in business at some point; the loss of a large customer, a substantial competitor moving into the market or maybe the loss of some key employees. The difference is made in how the company and management team responded during those trying times, proving to the acquirer the true value of the business and how resilient that company may be under their ownership. The difficulty Covid has presented is no different than any other trying issue; the first questions an acquirer or I will ask are going to be: “What were your 2020 results versus 2019,” and “What does 2021 look like versus 2020?”
Considering again my client under LOI in March of 2020: The original buyer’s investors and lenders became cautious at the time and it appeared the deal would not move forward in a timely manner. Consequently, my client and I took a harder look at the business performance through the first three quarters of 2020 and determined the business was actually on-track to at least match 2019 results and most year-over-year monthly comparisons were all positive; we also began to see some activity returning to the acquisition market and again felt strongly we could achieve positive results if we tried to find a new buyer. We decided to go back to the market, and although some of the typical buyers were still on the sideline, we found we had multiple potential buyers of other types and successfully received multiple offers on the business. The transaction ultimately closed at the end of Q1 2021 and even at a slightly higher price than with our original pre-Covid buyer.
Is now a good time to buy or sell a rental company?
My opinions can only reflect a “snapshot” in time. Some of the most optimistic times in the rental industry were in 2007 and again in 2019, yet events beyond our control (macro issues) caused those good times to evaporate quickly. Current ARA Rentalytics shows a modest 3 percent growth in 2021 (likely Covid “hangover”) followed by double digit growth for 2022. When considering the question of, “is now the time to sell,” the answer is YES, now IS the time for sellers with 2020 business performance remaining roughly in the +/- 5 percent range versus 2019 and if the company’s 2021 numbers are trending positively. For acquirers, now is the time to take advantage of cheap and plentiful capital and strong market trends; buyer thoughts are consistent with the old saying, “make hay while the sun is shining.”
Those familiar with me know I love analogies and common life comparisons to help put things into proper perspective. My name is Gary, which was a popular boys’ name back in the 1950s. Most Garys I meet are aged 55 to 70 and many are also business owners; many of us Garys have experienced several downturns or challenges in our lifetimes, mostly when we were much younger. I foresee the latest Covid scare will result in many Garys (and Michaels, Scotts, etc.) in the 55-to-70 year age range who are thinking they aren’t necessarily interested in experiencing yet another risk of owning a business through another inevitable crisis or downturn. As such, a good “inventory” of well-run, successful and strong potential future growth companies will likely be available for the current increased interested acquirer field.
Remember, we live in a data and results driven society. In a potential sale, acquirers will want to thoroughly analyze the business to fully understand the strengths, weaknesses, challenges and opportunities. If you are looking to sell, expect a thorough due diligence process (legal, financial, environmental, employee related, risk/safety, IT, etc.) and be prepared ahead of time with readily available and reliable financial and fleet data in Excel (not PDF) format.
Gary Stansberry is the president of The Stansberry Firm, LLC and specializes in business sales, fair market business valuations and operational consulting, including positioning businesses to increase their value. More information on the company can be found at www.thestansberryfirm.com. Gary can be reached at (210) 797-7368 or by email at [email protected].