Valuing assets

Coming up with a proper, and thoroughly vetted, valuation is essential for waste companies interested in acquiring another business. Waste Management, Houston, has been no stranger to the acquisition process in route to becoming the industry’s largest player.

Joe Cassin, western VP of business development for Waste Management, helps spearhead the company’s valuation and due diligence process when assessing potential acquisition targets. Cassin says that the groundwork for an acquisition is often laid well in advance of any agreement thanks to the company’s evaluation processes.

“As a company, we have 17 market areas managed by 17 area vice presidents who are responsible for the P&L of each of those markets, which can be as large as $1 billion in revenue,” Cassin says. “We are constantly analyzing those markets, and we then strategize on the right growth opportunities from an acquisition standpoint. This is an annual process that identifies the strategic growth opportunities as well as the potential acquisition candidates. Once we understand the benefit of a specific company, it’s the business development team’s responsibility to develop a relationship with those owners and, hopefully, when they’re ready to sell or curious to know their company’s value, we’ll be the first one they call. The valuation process is very straightforward and kept very confidential during the entire process.”

Cassin says there is a number of criteria Waste Management looks at during the valuation process. Among the most important considerations are the reliability of the target company’s long-term cashflow; diverse customer mix; favorable contract terms; age and compatibility of the equipment with Waste Management’s existing fleet; service area footprint; potential future growth opportunities; and Waste Management’s ability to recognize synergies of the business to be acquired. The company will also work to ascertain the percentage of temporary roll-off, broker and event work a company manages.

Once the two parties express mutual interest in exploring a possible acquisition and a confidentiality agreement is signed, Waste Management will request a half-dozen pieces of information to better understand the company and its operations. This includes an income statement, balance sheet, list of assets, head count by position and a list of any permits or real estate that’s going to be included as part of the transaction.

Cassin says that most of the company’s due diligence will be done remotely, with any on-site equipment inspections scheduled after hours or on weekends for confidentiality purposes. In addition to the financial due diligence, Waste Management will also want to understand a company’s safety culture, environmental compliance practices, any underlying HR issues, condition of equipment, day-to-day operational standards and billing cycles. While much of the financial information is formulaic, Cassin says that sometimes measuring a company’s culture can be more instinctual.

“Often you rely on your gut instinct,” Cassin says. “I can tell what kind of company it is and how it’s run often by looking at the trucks on the road. A clean and tidy truck shows pride of ownership verses one with a dashboard full of Post-It notes and food wrappers. When you see companies where the owners take pride in their equipment, you generally find that they’re taking care of their employees, customers and have a strong safety culture. A well-run company starts at the top and eventually trickles down through the entire staff. You really get a good sense of what a company is all about when you kick the tires and talk to the owner and see it with your own eyes. We’ll ask them about their safety policy, preventative maintenance practices, customer retention, and more, but again, you get a good sense of the business from walking their facility and seeing their fleet, which we do in every case.”

"When you see companies where the owners take pride in their equipment, you generally find that they’re taking care of their employees, customers and have a strong safety culture. A well-run company starts at the top and eventually trickles down.” –Joe Cassin, western VP of business development for Waste Management

Once the seller provides the requested information, Waste Management will model and review the pro forma typically over three or four weeks before the company presents a valuation, Cassin says; however, larger transactions may take longer to value based on the level of detail.

“While EBITDA multiples are widely talked about, we value companies based on several different metrics that analyze the long-term benefit to Waste Management,” Cassin says. “Once we have what we believe to be an accurate model that reflects what the target company can deliver (it generally won’t look anything like the seller’s financials because we’re going to look at the business synergies, etc.), we’ll then feel comfortable talking with the seller about our assumptions and valuation. The modeling takes into consideration everything from growth assumptions to capital requirements. At this point, we’ll meet with the seller face to face and walk them through our assumptions, valuations, due diligence process and what to expect next.”

Getting in the game

Cassin says that it’s important for companies thinking of selling to focus on some key areas of their business. Specifically, Cassin says that these companies should prioritize cashflow, customer loyalty, contract terms and the quality of the assets that will be delivered to the buyer. Having the right people in place also makes a company more attractive, Cassin says.

For other companies considering acquiring a business, Cassin says that focusing on a few key metrics can go a long way in ensuring a favorable transaction.

“Companies should consider the delivered cashflow and future capital expenditure requirements needed to keep the business going. They should consider what the payback period is in years and determine whether the contract term(s) support the multiple being paid. It’s also important to think about what their post-closing growth strategy is, whether customer retention will be a challenge, and if they have the right management team in place to integrate the business,” he says.

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Regardless if a business is looking to acquire another company or be acquired, Cassin says that the number of opportunities in the waste space makes it an attractive sector for interested parties.

“What’s unique about the waste industry is that there are many qualified buyers where funding is not an issue. If you owned a chain of dry cleaning businesses, for example, you might be challenged on finding a qualified buyer,” he says. “Conversely, if you own a well-run garbage company with a solid customer base, you’re going to be able to pick up the phone and be ‘retired’ within 120 days, if that’s what you’re looking for.”

Even with COVID-19 forcing Waste Management to transition some of its acquisition-related diligence to virtual meetings, Cassin says that the acquisition team hasn’t been noticeably slowed by the pandemic. Despite fears of how COVID might ultimately affect the M&A market, Cassin says that he’s confident that waste operators will be able to thoroughly vet companies and look past any short-term economic disruptions that would-be sellers are presently experiencing.

“When states opened up temporarily [in late spring], it looked as if there was going to be a quick recovery,” he says. “All waste companies have experienced challenges with hospitality, schools, special events, etc., after many of these entities were shut down for several months. That said, if somebody is thinking about selling now, even though their revenues have been temporally impacted, we still have a good sense of what their business will look like during the recovery. What we’re experiencing presently shouldn’t persuade companies to change their plans.”

The author is the editor of Waste Today and can be contacted at aredling@gie.net.