Transom Capital’s acquisition of the Tom Duffy Company—the private equity firm’s third purchase of a flooring distributor within 12 months—is merely the latest example in a growing trend of PE’s voracious appetite for distributors.
While relatively new for flooring distribution, private equity has been actively engaged in related industries including building materials. For example, six of the top 15 building materials distributors are PE-backed, with that industry seeing a trend toward well-capitalized super-regionals and national players.
Flooring distribution is following a similar path. The top four flooring distributors (Artivo Surfaces, UCX, All Surfaces and Tri-West) are evolving into super-regionals and/or national players in their own right by leveraging acquisitions or private equity money. As of now, two of the top three are PE-backed—All Surfaces (ShoreView Industries) and Artivo Surfaces, which is run by Transom, with more than $1 billion in committed capital. In addition, Center Rock Capital Partners, a division of The Merit Distribution Group, has completed a number of acquisitions in recent years—among them top 20 wholesaler E.J. Welch, along with Dealer’s Supply, Cheney Inc., and certain assets of Gilford-Johnson Flooring, which at the time was a PE-based top 20 distributor.
Mutually beneficial
Private equity’s move into flooring distribution makes sense on several levels and is mutually beneficial, flooring executives say. For starters, distribution typically has good cash flow and since PE firms finance their operations with heavier debt, cash flow can cover interest and help drive down that debt.
“Banks seem to love financing with distribution as the assets to support it are the two biggest drivers with distribution—inventory and receivables,” said Jeff Striegel, president of Elias Wilf, an Owings Mills, Md.-based distributor. “[PE] simply loves businesses that can be scaled up, and flooring distribution is right in the pocket in this aspect. Typically, PE can also remove a lot of internal cost as it relates to the backroom part of these companies such as with accounting, HR and executive management. Also, the larger size and scope can also impact operating expenses such as trucking, computerization and a host of other costs.”
Given the fact that PE firms have excess capital in which to invest—and distributors are coming off a down year—look for this marriage to continue, experts say. “The valuations of many floor covering distributors are still somewhat low based on current business conditions, and those valuations should increase as interest rates come down and business improves,” said Dave White, president of Tri-West Ltd., Santa Fe Springs, Calif.
The slow times now are expected to yield to a more enriched future for distributors given the shortage of homes nationwide that will necessitate long-term consistent building, as well as the high percentage of existing homes today that will require remodeling and renovation. “PE firms desire businesses that have a bright growth prospect like what you see when looking at building materials overall,” Elias Wilf’s Striegel explained.
While PE is drawn to distribution for the reasons previously outlined, there are many wholesalers—especially family-owned businesses—that desire private equity because they require capital to truly grow. And in some cases, some may lack a sound succession plan.
If anything, COVID-19 played a role in accelerating this dynamic, as the economic events of 2020 and beyond put many distributors in a position to re-evaluate their long-term ambitions—to stay and grow or to sell. “Many distributors have been around for many years, and our industry has an aging distributor ownership,” said Steve Kleinhans, president of Big D Supply, Phoenix. “Without a comfortable succession Galleher is now part of Artivo Surfaces, the industry’s No. 1 distributor in revenue. plan, distributor owners were ready for a profitable exit strategy. Private equity is probably the most likely place for distribution to find interested buyers at the price points they desire. These are not small business dealings and there are only so many organizations that have the wherewithal to afford [distributors] while having the motivation to pursue them.”
Furthermore, Kleinhans said PE sees floor covering as a robust industry with plenty of financial opportunities. “I think that those outside our industry perceive a lack of refinement [in flooring distribution] where there is an opportunity to create a more efficient operation.”
As the market continues to consolidate, distributors will need a certain scale to remain healthy and grow; otherwise, they will become smaller and niche-focused in order to survive, observers say. Those caught in the middle need to strategize accordingly.
“People managing outside capital are always looking for industries—and companies within those industries—that present opportunities for attractive returns,” said Scott Rozmus, president and CEO of Romeoville, Ill.-based FlorStar Sales, a top 20 distributor. “PE firms employ some pretty smart folks, and they apparently recognize trends that make floor covering distribution an attractive investment. Moreover, these firms often have equity positions in businesses either in adjacent industries or in other businesses whose management might bring specialized expertise or focus that add significant value to the pre-existing wholesale operation.”
In other cases, the distribution target is a mature company that doesn’t require a major overhaul. As Tri-West’s White noted, “The distributor usually requires some minor technology and personnel changes, along with an infusion of capital to grow the bottom line. If the PE company does its job, they improve the top and bottom lines and can turn a nice profit in three to five years when they sell the company.”
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