What today’s market means for independent operators

Years ago, I predicted a net loss of 15 to 25% of all independent operations over a 20-year period.

I was wrong. That number now stands at 70 to 75%, beginning around 2005.

As someone who has consulted as a mergers and acquisitions (M&A) intermediary in the convenience services industry since 1993, I have watched the viability of independents decline at an alarming pace.

Many operators I speak with today are concerned about the future of the industry. Last year alone, four of the largest independent operators in the U.S. sold their businesses.

Declining cash flow (for many), increasing government regulation, tariffs, supply-chain disruptions, rising health and insurance costs, and the growing inability to recruit or afford qualified route personnel have all reduced profitability. In addition, today’s operator must contend with the outsourcing of the U.S. economy and the potential loss of client employees due to robotics and artificial intelligence, which are eliminating jobs in many industries that have traditionally supported our business.

In a consolidating industry, only companies with strong buying power, regional/national reach and solid balance sheets will survive. Consider independent pharmacies as an example. When many of us were younger, there was an independent drugstore in every neighborhood. Today, CVS, Walgreens, Costco, Amazon and supermarket chains dominate that space. If there are only several hundred viable independents left nationwide, that is likely a generous estimate.

The good news

There is good news.

In most consolidating industries — telecom, airlines, industrials, banking and software, to name a few — the major players ultimately acquire their competition. Our industry is no different. The larger nationals and a handful of independents, along with several major coffee roasters and distributors, are actively working on transactions every day.

Market share for these buyers translates into lower (or eliminated) commissions and the ability to raise pricing, adding meaningful profit to the bottom line. The best transactions are typically fold-ins, which are made far more attractive within a purchaser’s national footprint. In many markets, clients will soon have limited choice as to who services their accounts.

When a buyer can generate substantial synergy immediately, it creates the foundation for a true win-win transaction.

Most of my successful deals today are completed with major strategic buyers, as well as select equity firms and roaster/food distributors. Over the years, as my relationships with CFOs and senior executives at these organizations have strengthened, transactions have become simpler — and purchase prices have reached all-time highs.

For example, I listed a $5 million operator in early December and received an offer sheet at the exact price and terms originally requested. The transaction will close in less than two months, start to finish.

Cost/time vs. cash flow

The costs associated with aggressively pursuing competitors’ accounts are often far less productive than expected. Winning an account away from an entrenched operator typically requires higher commissions, lower pricing and newer equipment. Add to that the time and expense of moving equipment, learning customer buying habits and building trust between the account and a new route driver. The result is a longer and more uncertain payback period.

By contrast, acquiring a competitor allows for the elimination of redundant facilities and personnel. Cash flow from the acquired accounts becomes immediate, and debt service begins the day the transaction closes. You also eliminate a competitor while instantly increasing market share and influence.

This is the main reason acquirers are actually paying more, not less. You would think that with very few operators left to purchase, the buyers would become more difficult. If you are being acquired by the perfect buyer, the deals are still terrific.

This does not suggest that organic growth opportunities should be ignored. On a case-by-case basis, good opportunities still exist — but they are becoming increasingly rare for most operators I speak with.

Positive growth or a graceful exit?

If the continued exit of operators proceeds at the pace I anticipate, within the next several years, most regions will consist of a few large national corporate or franchise operators, one larger independent (maybe), and a handful smaller companies. If you do not see yourself fitting into one of those categories, it may be time to seriously consider an exit strategy. For many owners and their families, this ultimately becomes a quality-of-life decision.

That said, quality of life also means enjoying what you do. If you still love the business, there is no reason to leave it just yet.

Selling a business is never an easy decision. However, I can say this with confidence: virtually every seller I have represented over more than three decades has told me they sleep better, experience less stress and enjoy a newfound sense of freedom after the sale.