Brent Paris, managing partner, Dubin Clark & Co., Jacksonville Beach, Fla., has spent his career focusing on sourcing, financing, executing and overseeing platform and add-on acquisitions, many in the party and event rental space. When seeking a rental company to invest money in, he is looking at the size and profitability of the operation.
“For a new platform company, it typically would have between $8 million and $100 million in revenue. We are looking at earnings — earnings before interest, taxes, depreciation and amortization (EBITDA) — from $1.5 million at a minimum to the $10 million to $15 million range,” he says.
“When it comes to valuation, the amount the company is spending on capital equipment, or CapEx, is important. We are looking for companies that have at least 10 percent EBITDA minus CapEx margins, with CapEx being the amount the company is spending on new rental equipment purchases each year. What we typically see is someone running 15 percent to 20 percent EBITDA margins and then usually around 5 percent revenue in CapEx, so EBITDA minus CapEx margin is around the 10 percent to 15 percent range,” Paris says.
“There is an ongoing need in these businesses to spend money each year. When we are valuing them, we are looking at the true free cash flow or EBITDA less CapEx. So, for larger companies, we are looking at $100 million in revenue, $15 million in EBITDA (15 percent) and $5 million on CapEx (5 percent) equipment,” he says, adding that the smallest company he has invested in was CE Rental, “which was doing around $1.5 million EBITDA when we first invested in it,” he says.
Paris says he looks for companies with a strong management team. “We will have majority ownership of the stock in the company and sit on the board of directors, but we are not involved in the day-to-day operation of the company. We would expect the existing management team to stay or if they are looking to retire, we will bring in a new management team as needed,” he says.
Once Paris and his team come in, their investment in the business is usually between four and seven years. “Our average investment holding period is about 5.5 years. We are investing heavily in the business as well as doing add-ons or tuck-ins acquisitions. We average four add-on or tuck-ins per platform company, which means we are adding another business to the one we own. Once we made the first investment in CE Rental, we acquired five other companies together under the CE umbrella, usually within the same region — mid-Atlantic to Southeast,” he says.
There are a variety of ways these companies can come into his orbit. “Oftentimes with a new platform, we will get introduced through a company like Latek Capital — an intermediary. Many times, for the add-ons or tuck-ins, we will contact those companies directly,” he says.
Paris says the advantage of going with an equity firm like his is the industry expertise it brings to the table.
“We understand the business, how it works, the capital needs and the software platforms. A lot of it depends on if they want to reinvest to own a certain percentage of the company, making sure they find the right partner to help grow their reinvested capital,” he says.
For Paris, a typical transaction is that his company buys 80 percent of the business and the owner keeps 20 percent of the stock. “That is what is called the ‘second bite of the apple.’ We help grow the company over the next five years. By the end, the 20 percent should be worth more than the 80 percent sold today. What typically happens is that we work together as partners and sell the company to a strategic acquirer or to a larger private equity firm. We exit the business and sometimes the former owner sticks around and runs the company for another owner for five years. It depends on the age of the former owner or CEO. Sometimes they will reinvest through us and then decide they want to retire, so the new group will bring in a new CEO,” he says.