A closer look at consolidation in the restoration industry
While consolidation can improve business efficiencies, it also carries pitfalls such as less reactive pricing.
How long does it take to build a successful restoration business? If your measure of success is that someone else wants to buy your business and combine it with their own, the answer is about eight years.
The reason it takes this much time doesn’t have anything to do with EBIDTA or balance sheets, but rather the confluence of three important factors: First it takes time to build a successful organization worth buying from a technical standpoint, which can be done in as little as three years. Second, you need willing buyers that are capable of integrating your operation into theirs. Finally, you need a source of money to fund the sale.
This combination of events is always in flux, with one or two of the required ingredients available at a time; occasionally, all three align to create a demand for sales and mergers such as the current market reflects.
History is repeating itself
A look back at the economic activity around consolidation in restoration shows spikes in merger activity in 2007, 2016 and now in 2021. In the two to three years after Hurricane Katrina, it seemed that many who had done well in the preceding years were ready to expand their empires and were in a mood to buy. There were also plenty of willing sellers looking for an exit route. These factors, combined with an abundance of money prior to the 2008 financial crisis created its own perfect storm for restoration industry consolidation. This combination of buyers, willing sellers and easy funding fueled similar cycles again in 2016, just as it is doing now.
To better understand why this pattern is happening again, it helps to understand what forces contribute to the push for consolidation.
The expectations of service from customers are growing every year and many organizations are struggling to keep up. Customers now expect hands on, concierge-level project management and detailed progress reporting like never before. Some providers feel that the only way they can provide this new level of service is to spread the new cost across a much larger project base. The easiest way to get a larger project base is to buy or merge with one.
Increased administration costs and creeping overhead also place pressure to consolidate in order to maintain efficiency. The cost of real estate and administration labor are rising at a rate faster than revenues and this pressure can often only be relieved by increasing the scale at which these services are provided. Doing payroll for one organization of 20 employees costs nearly as much as doing payroll for 80 employees. These types of efficiencies have always been a part of any merger and will continue to be impactful moving forward.
Evolving demand for technology fuels the need to constantly reinvest in newer more expensive platforms for product delivery. In the past, a single computer-based accounting system or estimating platform was enough. Today, restoration businesses use separate systems for moisture mapping, document retention, estimating, staff management and invoicing. This burden of technology has begun to transform the industry in terms of service and documentation. However, it also creates challenges for legacy operators who are faced with the choice of an ever-increasing investment in tech to be spread across a finite share of the market.
As the industry continues to trend toward consolidations, industry professionals should keep an eye out for great opportunities to enhance the customer experience and overall outcomes for claims as a result. In general, we can expect to see some of these positive effects:
- More uniform billings and administrative products. Organizations, whether franchised or company-owned, always push for more efficiency and brand awareness. This is made easier with larger monolithic approaches present in large organizations. It’s very easy to refine the appearance of invoices and marketing materials based on what works. Larger organizations simply make more sales and produce more invoices, which means that opportunities to learn and refine are much more frequent.
- Enhanced efficiency. The larger organizations allow for access at scale to better training, less expensive consumables and enhanced software systems that wouldn’t be practical for smaller companies. For example, imagine a small drying operation buying three pallets of concentrated cleaner to get the best price. It would take years for the small operation to use all the cleaner, not to mention the added cost of storing and preserving it in a way to keep it free of damage. Meanwhile, a larger operation may buy three pallets every week and send one to each region. The efficiencies gained are real and can be the difference between profit and loss at a given price point.
While there are positive effects of consolidation, the industry may also start to encounter the following potential pitfalls:
- Lack of choice and different approaches to the same problem. There will always be more than one way to complete a task, but consolidation may make the second and third ways much less prominent. For example, instead of three local options available for media blasting on a project — dry ice, baking soda and pressurized water — there may be only one readily available option as the consolidation process drives less profitable processes out of the market. Instead, the only way to get a more expensive option would be to call a specialist from several cities away. Because of consolidation, claims professionals may find themselves limited in choices on the types of services offered in all but the most specialized and cost-tolerant of circumstances.
- Less reactive pricing. Smaller operations must be agile to survive, often changing prices every few months to reflect market realities. Larger organizations may not be as willing or able to react to fast changes in the marketplace as they often set their base price sheets on a yearly basis and enter into long-term emergency response agreements that fix pricing. When prices are on the way up, the lethargic nature of larger organizations could be seen as an advantage for customers, but on the way down it’s just as likely to be seen as an encumbrance.
Predictions for the industry
As consolidation continues, there will be further movement of the industry towards managed repair products. As the pressures for uniformity in service and pricing grow, there will be an increasing number of restoration companies working with direct repair operations in an effort to take advantage of the services and volume discounts available to group members. While this is nothing new, the value proposition added with this approach continues to grow as participants get much of the same advantages of the large organizations at a relatively small cost.
The evolving state of the post-consolidation restoration industry also means that there will be plenty of new startups that are working to fill the voids left by the consolidation. While starting a new business is always risky, the restoration field has historically benefited from the rather consistent opportunities for work. No matter the economy there will always be floods, fires and storms. This consistent demand can be leveraged by the new startups in combination with emerging technology to build the next generation of providers that will be consolidating in 2030 and beyond.
Justin White is vice president of specialty services, principal building consultant, for Sedgwick.
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