At Waste Today’s Corporate Growth Conference, which took place Nov. 18-19 in Chicago, a group of industry leaders discussed the key fundamentals that drive business valuation and what metrics professionals need to be mindful of to get the most from their investment in a session titled “Understanding Business Valuation.” Led by moderator Effram Kaplan, managing director & principal at Brown Gibbons Lang & Company, the panel consisted of Waste Management VP of Business Development Joe Cassin, Veolia North America President and COO Bob Cappadona, Circon Environmental President Frank Iezzi, Alvarez & Marsal Managing Director Michael Gacek, and GFL Environmental Executive Vice President of the Liquid Waste Division Mark Bouldin.
Arriving at value
Iezzi says that when Circon evaluates a company’s value, a lot of considerations come into play.
“We look at things like whether the opportunity is a platform investment or a tuck-in investment, because the criteria changes accordingly,” he says. “[When it comes to valuations, we also look at things like] whether the company has unique permits, new technical capabilities, maybe something that is proprietary in nature or maybe there is some leadership in the market that lends itself to a unique client base—there are a series of value-creating criteria that as you check those boxes, valuation increases.”
Cappadona notes that when Veolia thinks about value, it contemplates how potential acquisitions might ultimately add to the company and fill in gaps in its service offerings.
“When we're looking at potential acquisitions, what immediately came to mind was technology,” he says. “[We look at companies and ask ourselves], ‘What potentially can we bring to the table [with this acquisition] that hasn't been brought to the table before?’ The second thing is we want to be a continental player, a global player. So, geography definitely is a factor for us in looking at opportunities that may fit a space where we currently don't have assets and where we would like to add assets. And certainly, when it comes to checking all the boxes, everything starts with companies having a proven safety record.”
Cassin says that while M&A activity is taking place at a fast and furious clip within the waste sector, valuations must be based on key fundamentals. He says that Waste Management takes a measured approach in valuing and acquiring companies with the long game always top of mind.
“There is so much activity that's out there right now and multiples are much higher because the public companies are trading at a higher multiple, so you really have to be a disciplined buyer and go after the right assets,” Cassin says. “Go after good core businesses that have a good asset base and solid cashflow. We want to look at companies where we can step into their shoes and not just do what they do today, but increase [the value and service offerings] significantly post-closing.”
Gacek says that having predictable cashflow is a must for generating high valuations, and that being able to show recurring revenue is critical for businesses looking to sell.
“The biggest thing in this industry that we all like is contractual recurring revenue,” he says. “That should be the biggest focus—getting customers under contract and having that predictable revenue stream come in every month. [Laurel Mountain Partners Managing Director Jeff Kendall] talked in a previous session] about how temporary roll-off business is unpredictable and can't necessarily be forecasted out with confidence. Operations like these are harder to get your arms around from a valuation perspective because those businesses can go up and down. The one thing that we always look at [at Alvarez & Marsal] is free cashflow: Are there nonrecurring, unpredictable revenue streams being collected? Are there any bad debt expenses that are tied to one’s operations? Are they collecting 100 percent of this unpredictable revenue? That’s what we focus on.”
Gacek says that it’s important to look at a company’s record holistically over three or four years when assessing value. Even if a company is seeing seasonal or event-driven revenue fluctuations, if it is able to show a reoccurring pattern over time, third parties can factor these patterns into a company’s valuation.
He cautions, however, that with the market as hot as it is right now, companies are trying to inflate their values as much as possible with the help of episodic revenues. This makes due diligence increasingly important.
“We've seen some very creative pro forma adjustments recently where companies might have event-driven revenue every five years and they try to run rate that revenue as if it can be expected every year,” he says. “We've seen a lot of companies get creative with their numbers, so you really need to get behind the numbers and understand what truly is reoccurring revenue and what is not. It's a hard balance when trying to assess recurring versus event-driven revenue.”
Bouldin elaborated on Gacek’s comments, saying, “It is very hard when you're buying a business, and they've had a large event, to give them full valuation for that. In general, I would say you have to mostly ignore one-off events and look at a running three- to five-year average [to understand trends].”
Cappadona says that it all boils down to transparency. Businesses want certainty when looking at acquisition opportunities, which is why a track record of recurring revenue is among the central things Veolia looks at when assessing value.
“At Veolia, everything starts with looking at how we want our core business to be structured,” he says. “In a typical year, we're expecting about 85 percent of the work that we do to be recurring. And within that 85 percent, you're going through bid cycles, so you know you have to recover some portion of that every year. [With episodic] single-lever-type events, you’re often so dependent upon that one thing [to hit your revenues]. We're looking at a more diversified approach. If you're looking at things that may be episodic, but you know that they're going to happen on a predictable schedule … you can certainly factor that into a valuation.”
Bouldin echoed Gacek’s sentiments on the importance of locking down contracts. When it comes to showing value, he notes that the more diversified a business is, the better.
“The antidote to is to diversify yourself. Don't rely too much on one group of customers. Rather than concentration, [what GFL wants is to spread out] to as many customers and as many geographies as we can,” he says.