M&A in North America

In this Readers’ Platform, your author looks at why M&A activity will continue to be buoyant both in North America and around the globe.

by Jeff Eaton

Your interest in the current merger and acquisition (M&A) activity in North America is understandable as we now regularly see announcements that another service business or supplier has been acquired by either a strategic or financial buyer. As you likely also know, acquisitions in the elevator business are not new and have been a part of our industry since its inception. 

The traditional “Big 4” OEMs have all attained their global preeminence largely through acquisitions. Of course, Otis, KONE, Schindler and TK Elevator (TKE) have also succeeded through providing innovative products and services throughout their history, but they each credit well-timed and strategic acquisitions with helping them to become global industry leaders.   

There is no better example than KONE. How else would an elevator company based in Finland, with a population of only 5.5 million (2021 census), become one of the largest (Top 3) global companies in an industry most associated with population density and large metro areas? In 1968, KONE acquired ASEA’s elevator business, which was already larger than KONE’s existing business and allowed them to expand to nine new countries. In 1974, they acquired Westinghouse’s European elevator business, which enabled both territorial and product-line expansion.   

Similarly, bold acquisitions fueled KONE’s global presence, such as the 1994 acquisition of Montgomery in the U.S. and deals in China and other emerging markets. We can see similar success stories from Otis, Schindler, TKE (now divested from its original German ownership) and smaller global competitors such as Mitsubishi, Fujitec, Toshiba and Hitachi.

Until 2017, most businesses sold in the North American elevator market were bought by one of the large OEMs and structured as simple asset deals with a familiar post-closing playbook that required an absorption of the founder’s brand and a harvesting of synergies to facilitate the return on investment for the buyer.  

In the last six years, many service businesses and suppliers have sold to financial buyers, including private equity sponsors and family offices. The influx of these financial buyers introduces new terminology, more complex transactions and a different playbook for conducting business post-closing.     

The keen interest from new investors is understandable given the consistent reliable metrics in our business, and, despite an increase in companies sold in the past five years, we are still part of a very fragmented industry in North America. There are hundreds of small independent elevator businesses of varying sizes and stages in their maturity. Some estimates count more than 800 independent elevator companies in North America.  

The increase in the sale of businesses is partly due to the appearance of a new array of buyers, but it can also be attributed to demographics. Many owners have reached retirement age. A limited number of owners may have a succession plan to pass the business on to family or sell to interested employees, but many of these small companies have not developed a succession plan. In many instances, the financial benefits of selling the business while also preserving a strong or, in some cases, better career path for offspring with the buyer is worth ceding control to new ownership.

Now, there are at least a dozen financial owners of North American suppliers and service companies, and we have seen at least five private equity firms enter and very successfully exit the elevator industry in recent years. These numbers address the commercial segment of the business only. The interest in the accessibility and residential niche is also significant and growing, and there are an additional half-dozen new investors in this part of the industry.  

What Do Buyers Look for in My Business?

It depends on the type of buyer.

If the buyer is new to the industry, they are generally looking for businesses that are large and profitable, have a strong management team, software systems that successfully support the business and favorable geography that lends itself to additional acquisitions. This is a platform investment.

If the buyer is currently in the industry, they may be looking for businesses in existing markets where they’re able to deploy synergies or to enter new markets that lend themselves to additional acquisitions where synergies can be deployed. These acquisitions are add-on deals. 

Whether the buyer is a new entrant or a strategic partner, they will be looking for a well-managed business. In addition to your financial metrics, such as revenue by line of business and profits, a potential buyer wants to understand the experience and capabilities of the employees and the short- and long-term aspirations of ownership.   

Do you use one of the off-the-shelf enterprise resource planning (ERP) systems such as Total, ESS or FIELDBOSS? There is no right or wrong answer to this question. 

Are you staffed and prepared for further growth? Or have you grown to a level that now requires further investment in people, process and effort to take a next leap and perhaps this is the catalyst for you to consider an investor? 

For more information on how to best manage your business for profitability, please revisit our July 2022 article in ELEVATOR WORLD, “An Insider’s Guide To Managing Your Elevator Business.” 

How Does Valuation Work?   

For both service businesses and suppliers, the adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) will be the most important measurement of valuation. Certainly, your monthly maintenance revenue (MMR) will be part of the evaluation if you are a service business.   

But, realistically, one company’s US$300,000 per month in MMR is different than another’s. What percentage of your maintenance contracts are with public vs. private entities? What is covered vs. excluded in your maintenance contracts? How much additional revenue (billable repairs plus modernization work) do you generate on each dollar of contractual maintenance? 

Do you have an organized process for your modernization business, including a good methodology for building your real cost for labor, estimating your costs to complete the project and good project management to ensure on-time and on-budget completion?   

There is widespread misconception that a potential buyer determines the value of a service business simply by applying a multiple to the seller’s MMR. Even in the “old days” when most every business was acquired by one of the four largest OEMs, the buyer still determined the proposed purchase price through a payback model using discounted cash flow with the adjusted EBITDA used as the primary metric to determine valuation.  

Many of you have heard about a friend or competitor who sold their service business for 20 or 30-plus times MMR. Even if the stated MMR multiple is factual, the profitability of the business expressed as post-synergy EBITDA would be the primary driver of purchase price.

The “mission critical” nature of elevator service results in very attractive valuation multiples fueled by the recurring revenue ensured by long-term maintenance agreements. The multiples remain strong in 2023 despite legitimate macroeconomic concerns about higher interest rates pushing up borrowing expense.  

You can be confident that elevator-specific M&A activity will continue to be buoyant both in North America and around the globe. In addition to the above-mentioned 12 or more current financial buyers who own service companies or suppliers in North America, there are dozens more that profess an interest in making an initial investment in our industry. 

You can also be certain that the Big 4 OEMs, as well as Fujitec and Mitsubishi Electric, will continue their growth initiatives in North America and that acquisitions will be an important part of those efforts. Owners who have sold their elevator businesses will advise that you should start to prepare now, even if you have no immediate plans to exit.

For more information on terminology and valuation specifics, visit Lift Business Advisors or call for further discussion.