Liquid waste businesses earn margins that some industries can only dream of. These double-digit returns, up to 40% in some cases, have created a gold rush, driving entrepreneurs, private equity groups and existing industry players to buy portable restroom companies from legacy owners/operators. Ten years ago, it was rare to have competing bids for a portable restroom company acquisition. Today, a deal may receive six offers.

But, like any business deal, everyone involved wants a fair price. An investor’s worst fear is buying a company that wasn’t worth what it appeared to be. An owner’s worst nightmare is undervaluing the business they worked so hard to build.

To make sense of how to properly value portable restroom businesses, I spoke with Damon Powell of FMC Advisors. Pulling from his 20 years of experience in the solid and liquid waste business, he walked us through the nine steps that he and his advisers at FMC follow to do due diligence when assisting in a portable restroom business acquisition.

1. Location, Location, Location

Location is the first and most important consideration to make when prospecting potential portable restroom companies to acquire. It will have the largest impact on the business’s growth potential and value. Before anything else, ask yourself, “Do I prefer to buy something where I currently live? Or am I willing to move for the right opportunity?” When buying larger waste companies, you should also consider whether they have multiple locations and their geographic concentration.

2. Asset Condition and Value

Once a location or locations have been determined, the list of potential businesses to buy narrows. With this short list, you can begin to research the condition and market value of these companies’ equipment.

“Sometimes, owners delay new purchases leading up to the sale,” explains Powell. “As a buyer, you should estimate what it would cost to replace and repair the business’s equipment in the first year to keep the business operational.”

Only after you’ve determined the preferred location and the assets of the companies in the area should you approach businesses about their financials.

3. Financial Review

The financial review stage is where the acronyms come out, such as EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and SDE (Seller Discretionary Earnings).

Financial reviews accomplish several things: checking the accuracy of a business’s books, profitability and growth rate. This stage is to understand a business’s annual net income, EBITDA and SDE, which are determined from reviewing the past three years of operations, with a primary focus on the last 12 months.

Financial reviews should reveal growth trends, or lack thereof. They should also help you uncover customer concentration, which is how much of the business’s bottom line comes from its top clients. For a healthy business, a typical customer concentration should be anywhere between 20% and 30% of revenue. The higher the concentration, the more reliant your business is on a small group of customers, which can be risky.

4. Employees and Company Structure

After you’ve decided that the numbers are attractive, you can get into the details. For example, it’s important to investigate how employee roles are defined at the company of interest. For larger businesses, there may be a general manager, an office manager, a route supervisor and service techs. At owner/operator outfits, the owners may wear all the hats and would need to be replaced in order to keep the business operational. Consider whether current employees will stay with the company after the acquisition and step into their roles on day one.

5. Licenses, Permits, Disposal

Licensing, permits and disposal options will dictate many of your potential operational costs. Disposal has been increasingly difficult and costly for liquid waste businesses, with the number of facilities that accept liquid waste dwindling year over year. Taking time to understand the disposal landscape in your chosen location will help you project the operational costs of that business now and into the future. For instance, if your trucks have to drive 60 miles to the closest disposal site as opposed to 30, that will have continuous impacts on labor, fuel and maintenance costs, to name a few.

From a permitting standpoint, some states can take up to a year or more to obtain the proper permitting to run your portable restroom business. Research your state and local regulations to estimate a realistic timeline for operability.

6. Existing Processes

While the portable restroom industry has a service component, it’s a transportation business at heart, running routes from Point A to Point B. So, the systems and software in place at the business in question can make or break profitability. Every mile driven has a cost associated with fuel, repair and maintenance, and labor, so it’s important to consider how the business is handling its logistics. You may find that there is room for improvement, which could mean potential margins for you when you take over.

“The companies using the best software are generally more productive and profitable,” says Powell.

7. Brand Reputation

Almost as important as permitting and software is the prospective company’s reputation and branding. Review its website, Google reviews and phone number to understand the reputation you’ll inherit. Brand reputation comes in a wide range. There are the top-tier businesses that provide service with a smile, middle-of-the-road companies that simply do the work, and then the lower tier of businesses, which may need reputation repair to reach their potential. The better the reputation, the smoother the transition will be.

8. Check for Synergies

If you currently run a business, consider synergies or costs, that will come with incorporating a portable restroom business into your existing operations. Maybe you run a solid waste company, so you won’t need more office administrators. Maybe you’ll move the company to your existing site, so you won’t need to consider extra rent or utilities. But there’s also a flip side.

To successfully acquire and operate your new business, you might have to spend more on certain line items than the owner-operator you’re buying from. For example, the seller may not offer the employee health benefits that your current employees receive. Consider the cost of offering those benefits to the employees coming over in the sale and factor that into your analysis.

9. Transaction Structure

Transaction structures vary and depend on deal size. No matter which structure you choose, it’s critical to have cash at closing. The three most typical transaction structures for smaller deals are:

• Cash at closing — Full company handover.
• Cash with a holdback — The owner keeps a temporary stake, i.e. 15% for six months, to ensure a smooth transition.
• Cash down with owner financing — The owner holds ownership and finances the sale over a predetermined period of time.

Wrapping up

Whether you’re buying your first porta potty company or adding to your fleet, success depends on what you don’t overlook. The portable restroom industry has thousands of details. How those details are handled determines profitability. This framework aims to help you untangle a potential deal and identify which ones make sense for you. 

If you’re navigating your first deal or want a second set of eyes, an acquisition adviser can help spot red flags and smooth out negotiations. They see these deals every day and can provide a third-party perspective that benefits buyers and sellers alike.