This article originally appeared in WQP April/May 2021 issue as "What Comes Next?"
It is oftentimes said that in the water industry the only thing our coworkers and colleagues fail at is retirement. Every day, for months, years and decades on end, those of us privileged enough to work in this space come to work and ensure that clean water reaches the households and businesses that need it, and dirty water gets cleaned before being sent back into the environment. And yet, as we all know, 2020 and 2021 have reminded us that the only constant in life is change.
The water industry is in the midst of a giant shift — not just due to COVID, politics or technology — but due to demographic destiny. The “Silver Tsunami,” that humorous refrain we all speak about as we look around industry conferences and see a sea of grey hair, has only accelerated over the past year as individuals across the country have decided that now is as good a time as any to begin the process of retiring. And, while the potential lack of trained, certified water and wastewater operators tends to receive the most attention in this regard, it is clear that the retirements of small or medium-sized business owners potentially poses the greatest threat to the future health of this industry. Who is going to transport those chemicals when an owner retires? Who is going to replace those pumps when an owner exchanges his/her line card for golf clubs? If retirement is on the horizon or if a second generation is unable or unwilling to be around for transferring ownership, then now is the time to begin thinking about the future of the business.
According to the California Association of Business Brokers, retiring Baby Boomer business owners are expected to sell or bequeath $10 trillion worth of assets over the next two decades, currently held across 12 million private businesses. The numbers in the water industry correspond with this broad national trend. According to a 2010 report by the American Water Works Association (AWWA), 30 to 50% of water and wastewater utility workers will retire or quit within the next 10 years. Notably, the average age of an operator is 47 years old and the average age of a small business owner in the U.S. is slightly older at 50.
The 4 Categories of Potential Business Succession Planning
For those thinking about retirement, one fact that should provide comfort is that there are many available options to consider. As many owners can attest, investors across the country are looking to invest in water and environmental companies, with owners likely receiving an email or more per month requesting a conversation to discuss the company’s future. Prior to accepting that conversation (or deleting that email), it is important to understand who the individuals on the other end of the telephone are and what might be their motivations. Typically, individuals that approach business owners can be broadly categorized into four categories: private equity, strategics, employees and industry professionals.
- Private equity firms, typically private groups of individuals that receive third-party investor money and use it to buy companies for a period of five to seven years and then re-sell, have begun to look more into water as they see how critical and steady this industry is through recession, pandemic and other issues.
- Strategics, the large national or multi-national companies that many in this industry compete with, have also begun to more actively seek out and buy companies in the industry with the goal of “rolling up” certain capabilities, technologies, or regions to do business.
- Third, an attractive option is for business owners to sell their business to their employees — either via a 100% buyout or a “seller’s note” where employees pay the owner over a number of years from the cash flows of the business.
- The last option is to find a buyer with experience in the industry that is looking to become an “entrepreneur through acquisition” — an individual or group with committed capital looking to buy an existing water firm rather than start a new one (such as Sylmar Group).
How to Prepare for Retirement
Once an owner has decided that they want to retire and the most suitable path for doing so, it is equally if not more important to begin to think about how to prepare for this retirement and ensure the long-term success of the business and its employees. In doing so, there are two primary tasks to manage—the “financial” and the “operational.” Some owners choose to focus on one or the other, but it is important to take each into account, both for ensuring that an acquirer will provide a fair price for the legacy the owner has built, while also ensuring that as an owner transitions out of the business, the appropriate vendor relationships, customer relationships and treatment expertise can be passed along to the right parties to ensure uninterrupted service.
In an ideal scenario, it is time to begin thinking about an ownership/management transition 10 or more years prior to retirement and concurrently start to promote younger employees into management positions. As we all know, managing a sales pipeline or service network is different than managing a team. Building out this leadership team will also provide the owner with the opportunity to begin knowledge transfer (sales, water treatment, chemicals) to the next generation, think through potential growth plans and decide where one wants to leave the business for the next owner or owners. Five years out, owners should begin to transition sales and vendor relationships to other employees in order to help minimize transition risk. Importantly, at this point, it is also important to begin to get a company’s finances in order. Typically, investors will look through the previous three years of financials with a fine-tooth comb so make sure that customer relationships are in order, that the customer base is diversified so you are not overly reliant on any one partner, and potentially hire a part-time controller or CFO to help begin organizing your income statement, balance sheet, cash flow statement, etc.
Lastly, about one year out from an ideal retirement date, it is time to start reaching out to the capital partners you have spoken to over the past several years. Remember that selling is typically a six-month process (at the minimum), including several months to get a fair offer and then another several months for the investor to do his/her due diligence.
For many years, the water industry has chuckled to itself about the Silver Tsunami, without providing those with grey hairs a clear-eyed vision of what this trend means for them. At this point in time, it is important for owners to remember that they are not alone. This industry is full of people who took their first job doing well service or cleaning tanks in the 70s and 80s that now, all of a sudden, are tasked with figuring out not if they should retire, but how.
While undeniably a stressful process, owners have a variety of resources at their disposal as they think about the best way to spend more time with the grandkids or more time on the golf course. Speak with other owners that have sold in the past, talk with investors that seem to know a bit about your business/industry well in advance of deciding to sell, and read online about the do’s and don’ts of a sale process. In the end, an owner’s business is his/her baby, and ensuring that it is treated well as it grows into its next stage of development is what everyone in this process deserves.