Roofing company diligence advice

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June 07, 2022

by a searcher from University of Virginia-Darden - Darden School of Business in Salt Lake City, UT, USA

Hi everyone, I'm rapidly moving toward an LOI on a small roofing company. Have any of you done significant diligence on home/commercial roofing or construction service companies? Anything unique to these types of business I should test for? Any other advice?

Thanks for any thoughts you can share.

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Reply by a searcher
from Northern Alberta Institute of Technology in Edmonton, AB, Canada
Res/Small commercial roofing companies are notorious for cutting corners and not applying the min. required safety standards, etc...
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from Massachusetts Institute of Technology in Colorado Springs, CO, USA
Yes, I looked closely at one that focused on hail repair. The profitability was HIGHLY seasonal (lots of hail = lots of money). However, the hail repair season spans the calendar year, so if you have a big hail summer, the company will see profitability from that season in the current and next calendar year. This masks the seasonality. What we did was get monthly financials and then recast the financial year to align with the hail season. We analyzed correlation between the revenue and net income vs. # of hail events in the county where the business is located. Suddenly what looked like fairly even financials suddenly looked like a really amazing year followed by a year that barely broke even. The sellers were selling after a span of time with two really strong hail years. Once we modeled that out, we saw that if we bought the business in a low hail year, we wouldn't even be able to pay the debt that year. We passed on the business and lucky that we did because the purchase year ended up being a low hail year. Basically we might have gone broke or had to inject more capital immediately after purchasing the business.

You can get weather data here: https://www.ncdc.noaa.gov/stormevents/
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