Purchasing Pool Construction company prior to possible recessionary period

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August 08, 2022

by a searcher from Central Michigan University - College of Business Administration in Grand Rapids, MI, USA

I am curious how people are underwriting deals where income is very project based, but also based greatly on discretionary spending. I have a pool construction company I am looking at that has obviously done very well over the last two years, but am struggling to wrap my head around a fair multiple and potential due diligence items to focus on.

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Glenn - great suggestions. A few things I would consider with this specific industry are as follows. 1) What does the current backlog look like? Some of these builders have large backlogs, which should keep you busy even with the start of a recession. 2) What are the market metrics at the moment? In many markets in the United States there is a huge backlog for new pools. Down in Florida I am hearing it is 2+ years before you can get a new pool installed due to backlogs. 3) How much business can be lost before you can still hit a breakeven? 4) How many pools have they built a year and how consistent has that construction been.

Personally I am bullish on the pool industry. I think since Covid there has been a renewed desire for people to control their own swimming habits and certainly in warmer climates pools remain very popular.

Please keep in mind that if you do look to use some sort of seller earn-out, you typically cannot do that in a traditional sense if you use SBA financing. You could build some into a forgivable seller note, but the full purchase price must be decided prior to closing for an SBA 7A loan. If you need additional assistance please let me know. I can be reached at redacted and I have financed pool supply and construction companies in the past, so I know the industry.
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Reply by a searcher
from University of Colorado at Boulder in Georgetown, CO 80444, USA
I believe the issues you are discussing directly relate to the acquisition of recurring revenue vs. new business. Because of your tenure, it’s not likely your firm will go to zero sales in a market turn down. One way to estimate loss of sales in a market turn down is to see what happened last time the market went backwards. For example: if the new builds in your area dropped 30%, you estimate a worst case 30% drop in new builds for your firm. This can be the base case to work with your lender for financing. Get your seller to take the rest on a note (hopefully with an earn out tied to the new build business) and round out your capital needs with investors or personal money. Also. I think live oak is a great bank to sanity check this question. Lisa Forrest does a great job.
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