How do you finance the purchase of a building supply company?

A distributor that lends to its customers

A homeowner pays at the counter. A framer, a remodeler or a production builder usually does not: most of a pro dealer's sales go out on trade accounts, delivered to a job site and paid for on terms. That makes a building supply company look more like a distributor than a store. It carries a large receivables balance, it takes credit risk on contractors of every size, and its cash is tied up in inventory and receivables that a lender has to finance separately from the purchase price.

Buyers at this size come in several forms: a sponsor building a regional platform, a dealer adding a yard in a neighboring market, an independent sponsor backing an experienced operator, or a management team buying out a retiring family. Each is underwritten on the same business questions, though an add-on is sized on the combined company and a management buyout leans on the team's record. The first question is always how the dealer earns, and on what terms.

Earnings through a cycle, not at a peak

Wood is a commodity, and its price can swing sharply within a couple of years. When prices spike, a dealer's sales rise without selling an extra board, and its margin often widens too, because inventory bought at the old price sells at the new one. When prices fall, the opposite happens. A buyer looking at a strong recent year needs to know how much of it was the market.

Lenders look at several years and ask what gross profit in dollars looks like at ordinary prices. A simple case: a dealer earned EBITDA of 900 in the year lumber peaked and around 600 in the years on either side. A cash-flow lender will size nearer the 600, and a purchase price built on the 900 leaves a gap the buyer must fill with equity, a seller note or a subordinated layer. Many dealers also use inventory accounting that moves reported income when prices change, so a lender will want a quality of earnings report that separates volume, price and inventory effects.

Lenders also ask what drives demand in the trade area. A dealer selling mostly to remodelers and repair contractors tends to hold up better in a construction slowdown than one framing subdivisions for a handful of production builders. Multi-branch dealers get credit for spreading across markets, and lenders look at each branch's results, not only the total.

Price the deal on normalized earnings. Lenders will, and the gap between the two numbers becomes the buyer's equity.

The borrowing base: receivables and inventory

The acquisition debt pays the seller. It does not fund next month's contractor receivables or the spring restock. That job belongs to a revolving line, and in this trade it is usually an asset-based line whose availability moves with the collateral. Lenders want it in place at closing, sized to working capital at the peak of the building season. See how a borrowing base works and using a revolver in an acquisition.

Contractor receivables are good collateral when they are collected. Lenders ask how the dealer sets credit limits, how old its receivables run, and what bad debts looked like in a slow year. A dealer that files preliminary lien notices on job accounts, where state law allows, has a second route to payment when a contractor does not pay, and lenders like to see that discipline. See what lenders look for in an AR aging.

The purchase agreement has to say how much working capital comes with the business. Most deals are priced cash-free and debt-free with a working capital target, so the seller delivers a normal level of receivables and inventory. For a seasonal dealer the target should reflect the season the deal closes in; see the working capital peg.

How the capital structure is usually built

A dealer this size has usually outgrown SBA 7(a), which caps at $5 million, and conventional lenders know the trade well. The layers are familiar; the proportions depend on how much collateral the business carries and how steady its earnings are through the cycle.

Where an asset-based lender holds the revolver and a different lender holds the term loan, the two split the collateral: the revolver takes first lien on receivables and inventory, the term lender takes first lien on equipment and the rest, and an intercreditor agreement sets the rules. See ABL and term loan split liens. Where the seller owns the yard, the buyer can keep the real estate out of the deal and lease it, or finance it separately; a sale-leaseback and acquisitions that include real estate cover the trade-offs.

What transfers to a new owner

Much of a dealer's value sits in relationships and agreements, and lenders want to know which of them the buyer actually gets.

• Contractor relationships. Pro customers buy from people: the outside salespeople, the branch managers, the counter staff who know their jobs. Lenders ask who holds the largest accounts and whether those people are staying. Retention agreements for key salespeople are common, and lenders read them as a sign the buyer has thought about it.
• Manufacturer dealer agreements. Window, door, roofing and millwork lines are often sold under agreements that need the manufacturer's consent to a change of owner. Losing a major line moves margin. See change-of-control consents.
• Buying group membership. Many independent dealers buy through a cooperative that pays year-end rebates. Lenders want those rebates shown consistently in the figures and confirmation that membership continues under the new owner.
• The yard. A lease from the seller needs a term, with options, at least as long as the debt, and a market rent. A purchased yard brings an appraisal and an environmental review, because yards can have fuel tanks, treated-wood storage and years of truck traffic.
• The seller. In a family-owned dealer, the seller has often known the builders for decades. A transition agreement, and sometimes rolled equity, keeps the seller invested in the handover.

The risks lenders price

• The building cycle. A slowdown in new construction hits volume and receivables at the same time.
• Builder concentration. A dealer where a few production builders take a large share of sales carries their risk, and the borrowing base caps what those accounts can support. See customer concentration.
• Bad debt. Small contractors fail in downturns, and a dealer with loose credit limits finds out all at once.
• Competition. Home centers and larger national dealers compete for the same pro trade; lenders ask what keeps contractors buying from this yard.
• Inventory quality. Dead stock, damaged material and special orders nobody collected sit on the balance sheet at cost and sell for much less.
• Fleet and yard capital needs. Aging trucks and forklifts need replacing; lenders treat that spending as a cost of staying in business. See maintenance capex.

What goes in the file

The term loan and the revolver each have their own list. For the term loan: the P&L, the balance sheet, a debt schedule, and optionally a year-to-date P&L through last month-end and an AP aging. For the asset-based line: an AR aging by customer with days outstanding, an AP aging, the balance sheet and P&L, the debt schedule and existing liens, and an inventory report, with bank statements and two to three years of business tax returns often requested. For the acquisition itself: the target's latest full year of figures, never an older year, for every company being bought, and the letter of intent. A building supply file is stronger with:

• Sales and gross margin by product line and by branch for several years, through at least one price swing.
• Sales by customer, including the largest contractor and builder accounts.
• Bad-debt write-offs by year, and the dealer's credit and lien-notice procedures.
• An inventory report by category, with the age of slow-moving stock.
• Dealer agreements and buying group terms, with rebate history.
• A fleet and equipment list with ages, and the lease or property details for each yard.

Senior bankers run every Midas Partners engagement. Once the documents are in, software builds the financing model, lender presentation, blind teaser and underwriting memo in a day, and a senior banker checks every page before the client approves it; by hand, the same package takes at least a week. The model sizes the revolver and the term loan together, on normalized earnings. Of the 1,800+ lenders in the book, 235 write asset-based loans and lines and 1,148 write term and private credit, so both pieces can be placed at once. See the package.