WasteExpo 2021: Understanding waste business valuation

Despite concerns that COVID-related impacts might slow merger and acquisition activity heading into 2021, appetites for attractive waste businesses have kept pace in the first half of the year.

Moderated by Bert Rosica, managing principal of A.E. Rosica & Co., a June 30 WasteExpo session titled “Understanding your company’s valuation” featured panelists Rob Michalik, managing partner at Kinderhook Industries; Joe Cassin, VP of business development at Waste Management; and Mike Teplitsky, partner at Wynnchurch Capital.

The panel discussion centered on parameters that affect valuation, what businesses look for when evaluating companies, and how prospective sellers can maximize value when coming to the table.

According to Michalik, the management infrastructure of a company is critical for assessing value.

“For us as financial investors, we’re looking at the team,” he says. “For [platform acquisitions], we want to have the right team to grow the business. Management capability and the executives within an organization are the most important thing for us when we look to buy a business. We’re ultimately looking to back a team to build the company. There is no such thing as a great company that doesn’t have great people. The learnings we’ve had over time is that when we’ve been successful, it has been because our management team has a great strategy and has a cadence and a rhythm of how they run a business, and they’re successful at it.”

Beyond a strong team, Michalik looks for growth opportunities within the company’s market when assessing an acquisition.

“We want to see the opportunity to take a middle-market business, a business that has $20 million to $50 million in revenue, and we want to figure out how we can grow that to be $100 million to $150 million in a 3- to 5-year time horizon,” he adds.

Cassin shares that as the biggest player in solid waste, Waste Management has a defined set of criteria it looks at when assessing companies for a prospective acquisition.

“As a strategic buyer, we are looking for companies that are well run, that have good equipment that isn’t 15 or 20 years old, and we’re looking for a good, reliable customer base and cash flow with long-term contracts and decent margins. Because of Waste Management’s footprint across North America, a lot of our deals are considered tuck-ins, so we can eliminate a lot of the back-office staff and get a lot of synergies out of [our deals],” he says.

Michalik says that when examining a business, “quality of earnings starts with quality of customers” and that the waste a company manages is its most important asset. To control this waste, companies need to provide good service at a fair price, he notes.

With the operational hazards that pervade the solid waste sector, Michalik says that companies with a good safety record have a substantial leg up when being analyzed for purchase.

“One of the interesting things with the waste industry at the moment is that insurance premiums are going through the roof. Worker, medical, collision—all of these premiums continue to skyrocket. … The independents are getting hammered, so safety protocols are critical,” he says.

Michalik says that for every business the company buys, if they don’t have a camera system in their trucks, they are installed on “day one” to improve training and accountability while reducing liability.

Teplitsky, speaking on experience investing in waste equipment manufacturers, says that the systems and equipment that a company has in place are some of the central things Wynnchurch Capital looks at before making an investment. He also says that, contrary to popular belief, private equity firms often seek to infuse money into a business rather than strip costs as a way to boost value.

“Private equity gets a reputation for coming in and stripping costs out of a business,” he says. “The reality is that when we get involved, a lot of times, we’re coming in and putting in new systems and tools and hiring new people as we increase investments.”

Due to the complex nature of performing due diligence on a company, Cassin says business owners can expedite the process by getting their ducks in a row prior to engaging with a prospective suitor. He says owners should get organized and find an experienced business attorney that can help guide them through the process. 

“Prior to a sale, often entrepreneurs will think, ‘Gee, I don’t want to spend on a new software package, or that new piece of equipment because I’m going to sell.’ My advice is that you should always run your business like you want to own it when you’re preparing for a sale. … If you’re happy owning your business, and you don’t care whether you sell it, you have a better chance of selling it. If you’ve underinvested, and all of a sudden you’re stuck with it, you’re going to be pretty anxious,” he says.

Teplitsky says that coming to the table with a valuation in mind is essential, and this valuation should be diligently researched.

“You have to figure out what your real valuation is. You need to talk to people, get advice and figure out [if what you are hoping to get] is realistic. Most deals die because of [discrepancies] in valuation,” Teplitsky says.

Rosica concluded the session with parting advice for those contemplating a sale.

“Seller expectations need to align with market realities. If they’re not aligned, then now is not the time to sell,” he says.