The Wall Street acquisition model

Since the late 1990s, consolidations within the green industry have gained notoriety. Unfortunately, for many of the consolidations, quality control in the field and customer attentiveness have suffered considerably.

Roll-ups – a form of consolidation where a company simultaneously consolidates $200 to 300 million in businesses and goes public at the same time – in the green industry were the craze when the consolidations began. A roll-up is also referred to as a “puff” company – one that goes from zero sales to a minimum of $250 million overnight.

Consolidations are the current trend – a company or group of companies and/or investors gain market share by purchasing other companies. The acquiring of other companies is the easy part. However, these companies need to have “legs.” They have to function efficiently and make money after all the acquiring is done.

This is where many consolidators within the green industry have had serious problems. They’re not run efficiently, primarily due to a lack of middle management and the appropriate systems to manage them. By systems, I mean a computer system that consolidates the entire operation, and which does the estimating, accounting, job costing, etc.

HOW IT IS SUPPOSED TO WORK. The gross profit margin (GPM) evaluation model that I discussed in my last article is fine for evaluating smaller companies – those under $2-3 million in annual sales. However, a more sophisticated model is normally used when a larger company is being evaluated. I call this the “Wall Street” evaluation model. Some refer to it as the EBIDTA (earnings before interest, depreciation, taxes and amortization) model. I simplify the EBIDTA model for use in my Wall Street formula (see Fig. 1), which is fairly straightforward. Most of the larger consolidators today are using the EBIDTA model or a version of it when evaluating a business for purchase or sale.

Real-world examples
To see the Wall Street valuation model in action for two companies with EBIDTA at 15 and 25 percent, click here.


This article was adapted from James Huston’s books “A Critical Analysis of the MORS Estimating System” and “How to Price Landscape and Irrigation Projects.” To order Huston’s books or to obtain a free audio book version (plus S&H) of “A Critical Analysis of the MORS Estimating System,” go to www.jrhuston.biz.