Private equity is changing roofing, but it isn't changing the fundamentals

Building a business for any future.

Private equity has become one of the most talked-about forces in roofing. Contractors are being approached about acquisitions, regional platforms are expanding, competitors are joining larger organizations and independent owners are asking what consolidation means for their businesses' futures.

I have had the opportunity to see this from both sides. I’ve worked with private equity groups evaluating roofing businesses, and I also spend a significant amount of my time working with contractors to strengthen operations, improve profitability and build better companies. That perspective has reinforced something I believe is important in this conversation. Private equity is neither automatically good nor automatically bad for roofing. It is capital combined with a business strategy. What happens next depends on how well that strategy is executed.

There is no question that consolidation is changing the competitive landscape. The roofing market remains highly fragmented, creating opportunities for larger organizations to gain scale through acquisitions. For contractors joining the right organization, there can be meaningful advantages.

Additional capital may support technology, recruiting, equipment, acquisitions and geographic expansion that would have taken an independent company years to accomplish. Larger organizations may also provide stronger purchasing leverage, centralized administrative support and management resources that help a good contractor grow faster. But scale also creates challenges.

Combining roofing companies does not automatically create operational excellence. Different cultures, estimating practices, compensation structures, software platforms and production systems still have to be aligned. Local relationships that took decades to build still need to be maintained. Talented employees still need leadership. Customers still expect service.

Capital can accelerate a good business model. It can also accelerate the problems in a bad one. That is one reason I don’t believe independent contractors should look at consolidation and assume they can no longer compete.

A well-run independent roofing company still has tremendous advantages. It can make decisions quickly. Leadership can remain close to customers and employees. The company can specialize in a market, system or customer type where it has established expertise. An owner who understands the numbers can also make long-term decisions based on what is best for the company rather than an outside investment timeline. 

The real competitive threat is not private equity. It is a better-run competitor. Whether that competitor is independently owned or backed by institutional capital makes little difference when they are competing for your customers and employees. 

That brings me to a question I increasingly hear from contractors: Should I prepare my company to sell or to remain independent?

My answer is that you should be doing many of the same things either way.

Build accurate financial reporting. Understand job costs and margins by department. Develop dependable forecasting and work-in-progress processes. Reduce dependence on the owner for every decision and build management depth throughout the organization.

Document your procedures. Control customer concentration. Develop your people. Build recurring service and maintenance relationships where they fit the business. Use technology that provides management with timely information rather than simply creating more data.

Those practices make a company more attractive to an acquirer by reducing risk and demonstrating that the business can operate beyond its founder. They also make an independent contractor much harder to compete against. That is the part of the private equity discussion I believe receives too little attention.

Owners sometimes become focused on valuation multiples and what another roofing company reportedly sold for. Those numbers may be interesting, but business value is created long before someone makes an offer. It is built through years of disciplined operations, profitability, management development, customer relationships and repeatable performance.

Owners considering a transaction also need to understand more than the headline valuation. They need to understand what they are actually agreeing to. How much consideration is paid at closing? Is equity being rolled into the new organization? What responsibilities remain afterward? How much decision-making authority changes? What expectations are tied to future performance?

Two offers that appear similar on the surface can become very different transactions once those details are understood. The same level of thought should go into the decision to remain independent. Independence is not a strategy by itself. If you want to remain independent, you still need the systems, leadership, financial discipline and competitive advantages necessary to perform against increasingly sophisticated organizations.

I don’t believe the roofing industry is headed toward a future where every successful contractor belongs to a large platform. I do believe consolidation will continue to raise expectations around financial management, technology, recruiting, operational consistency and leadership. That can be healthy for the industry if it pushes everyone to operate at a higher level.

After decades in roofing, one thing has not changed: ownership structure doesn’t install the roof, take care of the customer or create the culture. People do. Private equity may be changing who owns some roofing companies. It doesn’t change what makes a roofing company worth owning in the first place.