M&A keeps business transition top of mind for owners in waste management

How and when to consider a business transition has been a hot topic among leaders in the waste and recycling sectors this year. Companies continue to report a high level of interest and unsolicited offers from potential acquirers in an industry where consolidation shows no signs of slowing.

While some of these offers may seem attractive, owners in the waste and recycling industry have invested too much time and effort and have too much at stake to jump at an offer that doesn’t properly value their business or prepare them for life after transition. Consider the M&A market, your business’s value, and your goals. When these factors align, it’s the right time to move forward with your transition.

M&A activity in waste and recycling

The combination of active buyers and motivated sellers has kept M&A activity strong over the past year, even if the pace has decreased from post-pandemic highs. Attractive valuations in both the waste and recycling sectors have piqued the interest of sellers, particularly baby boomer business owners who are at or near retirement age and ready for the next phase of their lives.

In the waste services sector, consolidators continue their quest to fill regional coverage gaps, strengthen cash flow, and expand capacity to meet the expected growth in demand for waste services in the coming years. Large competitors and private equity-backed platform companies are extending their geographic reach and scaling up through acquisitions.

Recyclers have seen steel companies backwards integrating into the scrap metals market in recent years as new steel production plants rely on high quality scrap metal for raw material. This shift in demand, and the changing requirements for recycled materials, along with disruption of foreign brokerage markets have made strong, thriving metal recyclers attractive acquisition targets.

Is your business ready?

Even in a seller’s market, it may not be the right time to sell your business just because the opportunity exists. The right timing depends on whether you’ve been able to build the business value you want and adequately prepare your business for a sale.

Market share, cash flow, profits, a strong management team, efficient processes, and a skilled and loyal staff contribute to your business’s financial worth and can maximize proceeds from a sale.

Beyond these factors, what enriches value can vary depending on the acquirer. A private equity firm may value management systems, technology, and the use of robotics to enhance scalability, while a competitor looking to expand market share and find synergies with consolidated operations may prioritize customer relationships.

Careful preparation will have you ready to respond to unexpected offers or opportunities and will increase the likelihood that the seller will recognize the value you’ve built. The fundamental preparation steps include:

• Organizing financial records – Prepare financial documents including accounting policies, summary overview, 12-month budgets, projected performance, and balance sheets. A Qualities of Earnings evaluation can validate the sustainability of your earnings.
• Conducting internal due diligence – Update and document operating processes with a basic overview, regulatory compliance reports, and detailed financial projections.
• Strengthen key relationships – A buyer may depend on retaining your best customers and employees. Bolster these ties to increase the likelihood of a smooth sale.
• Ensuring stakeholder buy-in – Get early approval from affected management, owners, and family members. Discuss the planning process in detail, keeping them informed about your potential transition plans.

As you ready your business for a potential sale, also consider what your business will require if you don’t sell. This may include investments—trucks, robotics, information technology, staff—or ratcheting up leader time and energy to compete. The decision to sell or not should consider the ongoing requirements of business operations.

Picture the endgame.

Successful transitions are often led by owners who have a clear vision of their goals and their life beyond the business. That focus helps owners make informed decisions both financially and in terms of ongoing family commitments.

Gain clarity by considering:

• Are you ready to let go of the business? Consider the deep personal and professional ties you’ve built. It’s natural to grapple with your legacy as you consider your next steps. Owners don’t often spend enough time thinking about their life after the exit. Make time to explore and cultivate your other interests. 
• What will occupy your time, energy, and focus when you’re no longer responsible for running the company? Think about charitable endeavors, family activities, education, or other passions that you want to pursue. Everyone needs a purpose. Start discovering yours.
• How will your exit affect your spouse, partner, children, and other family members? Business transitions can affect relationships and family dynamics, even for family members who aren’t working in the business. If the business holds a multi-generational family together, you’ll want a substitute for when that bond is gone. It’s never too early to set expectations and establish rules for the family to maintain cohesion and harmony.
• What are your financial needs? It’s not uncommon to see owner’s expenses covered by the business—some that you may take for granted. Understand your ongoing financial needs and their timing. You created a great business by building the right team to help you run it. Apply that same philosophy to managing your wealth. It’s never too early to start building your wealth team. 
• Have you explored your wealth transfer options? Take care of gifting strategies, asset titling, and family governance well before a sale or transition. The earlier the better.

Distill your goals into a perspective on what you—as owner—are looking for from a transition, preparing you for when the market conditions and your business’s value point toward an exit. That way, you’ll be confident in making an informed decision when an offer comes your way.

Explore your options.

When market conditions, business readiness, and owner goals align for a transition, you’ll need to decide on the best structure for your situation. Exits generally follow one of three approaches: selling a partial stake, outright acquisition by a third party, or passing the company to family members. Each option comes with considerations that should be part of any sale or transition plan:

1. Partial stake. Selling part interest to a private equity partner

Key considerations:

• Your willingness to have a minority ownership stake.
• The ability to give investors a say in how the business operates with either a private equity representative on the board or in a senior management position.
• Your ability to accept the possibility of having a boss, after years of being the boss.

2. Outright sale. Selling to a strategic buyer

Key considerations:

• The value you’ll receive after taxes and transaction costs, including cash, notes, earn outs, and the potential “second bite of the apple” from rollover equity.
• The ability to evaluate offers with the aid of a current valuation by qualified industry experts.
• Your ongoing commitment in active management or as an advisor.

3. Family transition. Transitioning your business to your children or other relatives

Key considerations:

• The business acumen, experience, and preparation of your successors.
• The ownership, financing, and tax considerations of a family transfer.
• The current leader’s ongoing role and sources of funds post-transition.

Transitioning a business can be a daunting task, no matter which path you choose. Build a strong advisory team to serve as a sounding board for your short and long-term business plans, help you establish clear objectives, and tailor an exit strategy to help you achieve them. Members of this team should include your key executives, business advisors, CPA, attorneys, bankers, and M&A advisors.

Don’t risk leaving money on the table. Your financial advisors can help with individual wealth management during and after the transition, delivering the greatest value for you and your family.