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What Is This Company Worth?
Two industry veterans say that when asking this question about a modular business, there are a couple of special considerations...
In any acquisition, the financial health of the target company has to be carefully scrutinized and its market value accurately calculated. Some people who have participated in recent deals involving modular companies say these issues warrant extra attention in the current market.
One cautions that modular's attractiveness as an investment may lead some purchasers to over-value a company. “In part, modular is the shiny object right now, says Jim Dunn, President & Founder of Stack Modular in Vancouver, BC, which sold a 50% stake to Bird Construction in Ontario in 2017.
While Bird presumably did careful due diligence before investing in Stack, Dunn says that not all modular companies are a great deal. "There are a number of modular companies that have raised some capital and sold equity that probably shouldn't be valued as they are," he says.
The shiny object Dunn is referring to is modular's ability to complete more homes in less time. "Suppose you're a mom and pop shop in California or Oregon or Idaho. Now suppose you don’t have a ton of experience but you tell people you're going to solve the housing crisis and, as a result, you get a valuation that you maybe don’t deserve.”
Supply and demand may also inflate valuations. "There are very few modular companies out there compared to conventional builders, so that drives up their value — sometimes when it’s not deserved.”
That's not to say that there aren't a lot of small modular companies that would make a great investment. However the purchaser has to look carefully at the company's profits, its work backlog.
Photo: Modules from Guerdon Modular being set as part of a large multifamily project in Oakland Calif.
Watch Out For Debt
Another industry veteran cautioned against investing in debt-burdened modular companies unless you have a way to discharge that debt on acquisition.
“If I was talking to investors, private equity firms or investment firms, my advice would be that some of the traditional highly leveraged transactions are troublesome for the commercial modular business," says Lad Dawson, CEO and Managing Partner as Guerdon Modular in Boise, Idaho.
Dawson and a partner had founded Guerdon in 2001. Then in 2014 they sold it for $17 million to an investment group that included Main Street Capital Corporation and Riverlake Partners. Not long after that, the company got into some financial trouble. Part of the problem was a management team that didn't understand the industry, but the biggest issue was the balance sheet. “The investors had structured the transaction with a very high reliance on debt," according to Dawson. "That doesn't work well for the modular industry.” It kept Guerdon from growing despite a healthy market.
In particular, the debt made the company unable to bond large projects. “If you don't have bonding, then the construction lender has to be willing to underwrite your balance sheet. And if your balance sheet is made up mostly of high-cost debt with a single lender, that creates a credibility challenge," he says. "If you can't get the construction lender to say yes then you start losing deals. It’s my understanding that was a big challenge for the company.”
So in February of 2020 Dawson teamed up with a New York investment firm to re-purchase the company. They acquired the debt from Main Street, which was retired in the transaction, and also invested substantially more money into the company for working capital and growth capital. Guerdon now has no debt.
The approach seems to be paying off. Dawson says that, with no debt, Guerdon is now working with developers on planning projects in the $100 million plus range, something that wasn't possible before. “We have a strong balance sheet with no debt," he says. "We have excess cash balances and we have bonding facilities. We're capable of demonstrating to any contractor, developer or lender that we have the financial resources and the balance sheet to support any project, no matter how large."