A lower-middle-market roofing company is usually bought with a senior cash-flow term loan and a revolver, or a unitranche loan where more debt is needed, with sponsor equity, rollover or a seller note beneath. Senior cash-flow lenders commonly lend 2x to 3.5x EBITDA, and roofers with a large commercial service and reroof base get the most credit. Lenders size on a normal year, not a storm year, and test the mix of retail, insurance, commercial and service work, how crews are employed and insured, the warranty tail, bonding and who holds the licenses.
- Usual structure
- Senior term loan and revolver, or unitranche; equity, rollover or a seller note beneath
- Senior leverage
- Commonly 2x to 3.5x EBITDA, on normalized earnings
- What lenders value most
- Commercial service, maintenance and reroof work for repeat building owners
- What lenders probe hardest
- Storm-driven revenue, subcontracted crews, safety record, warranties, bonding
- Collateral
- Light: receivables, trucks and equipment; the price is mostly goodwill
Four roofing businesses behind one set of financials
Lenders like roofing for the reason building owners cannot put it off: a leaking roof gets fixed. But the financial statements hide what kind of roofer a company is, and the kinds carry very different risks. The first thing an underwriter does is split revenue by where the work comes from.
| Type of work | How it earns | What a lender worries about |
|---|---|---|
| Commercial service and maintenance | Leak calls, inspections and maintenance agreements with building owners and property managers | Usually the steadiest line; lenders want the agreements and the repeat customers |
| Commercial reroofing | Replacing roofs on existing buildings, often for repeat owners, bid or negotiated | Margin on fixed-price bids, backlog quality, a few customers making up much of revenue |
| New construction | Roofing for general contractors on new buildings, often bonded | Cyclicality, retainage, pay-when-paid terms, bid discipline |
| Residential retail reroofing | Homeowners replacing an old roof, found through referrals and marketing | Whether leads depend on the founder's name or on a marketing engine the buyer keeps |
| Insurance restoration (storm work) | Replacing roofs damaged by hail or wind, paid largely by insurers | Volatility: revenue follows the weather, and collections wait on claim approvals |
Commercial roofing platforms built on service and reroof work for repeat owners are among the more financeable companies in the trades, because much of the work is non-discretionary and recurs. A company that doubled its revenue chasing hail two states away reads as a good year that may not repeat. Most sit between the two, and the file should show the split plainly rather than leave the lender to guess.
Storm years and ordinary years
Sellers want to be paid on their best year. Lenders size debt on what the business earns every year, because the payment is due every year. When the latest year includes a storm, a lender looks at the years around it and asks what revenue and margin looked like without the storm work. A simple illustration: a company that earned 400 in two ordinary years and 900 in a hail year does not have a 900 business. A lender will size on something closer to the ordinary years, and credit part of the storm work only if the company has done storm work in most years.
The same discipline applies to backlog. Lenders read a commercial roofer's backlog by customer, margin and start date, and discount work that has been awarded but not contracted. Where the price rests on a storm year or on backlog the lender will not credit, the gap is closed with more equity, a seller note, an earnout or a lower price. How lenders test a price is covered in how lenders decide if the purchase price is too high, and how they treat declining or peaked earnings in financing an acquisition with declining earnings.
Show the lender every year, the storm year included, broken out by type of work. A normalized view the buyer builds is more credible than one the lender has to build itself.
Crews, safety and the licenses
How a roofer staffs its jobs changes both its costs and its risks. Some companies employ their installers; many use subcontracted crews paid by the square or by the job. Subcontracting keeps fixed costs down, which lenders like in a volatile trade, but it raises two questions. Will the crews keep working for a new owner? And are they independent contractors, or employees in all but name? Misclassification can bring back payroll taxes and workers' compensation premiums after the sale.
Insurance is a large cost in roofing because the work is dangerous. Workers' compensation premiums depend on payroll, classification and the company's own claims history. A poor safety record raises premiums, can cost the company commercial bids that screen on safety, and can make coverage hard to find. Lenders ask for the policies, loss runs and any open claims.
In many states a roofing or contractor license is held through a qualifying individual, and in a founder-run company that is often the founder. Lenders want to know who qualifies each license from closing and whether a second qualifier is in place. Key-person risk runs further: the estimators and project managers who hold the commercial owner relationships are the business, and lenders read retention agreements and rollover equity as evidence they will stay.
Warranties, bonding and working capital
Every roof carries a workmanship warranty, and many carry a manufacturer's warranty that depends on the installer being certified. Those promises run for years after the job is paid for. In a stock purchase they stay with the company; in an asset purchase the buyer can leave old liabilities with the seller on paper, but owners will still call the name on the truck. Lenders ask for warranty claims history and whether any problems were systemic, and whether manufacturer certifications carry over. Expected callbacks belong in the price or an escrow or holdback; the structural difference is in asset purchase vs stock purchase.
A commercial roofer that bids bonded work needs its surety to underwrite the new owner. The surety looks at working capital and net worth after closing, so an acquisition that strips the balance sheet can shrink the bonding line, and a buyer who cannot keep it keeps only part of the business. Surety and lender should be talking before the deal closes.
Working capital has a shape of its own. Residential customers pay deposits before work starts; insurance jobs are paid in stages as claims are approved; commercial jobs carry retainage paid at completion; and materials are bought on credit from a distributor. Deposits on unbuilt jobs are a liability the buyer inherits, which the working capital peg should handle. A revolver secured by receivables funds the season: asset-based lenders typically advance 80% to 90% of eligible receivables, but they treat retainage and insurance-claim receivables more cautiously than ordinary invoices, and receivables more than 90 days past invoice are typically ineligible.
Putting the capital structure together
| Layer | Role in a roofing acquisition | Watch for |
|---|---|---|
| Senior term loan | Funds most of the price on normalized EBITDA; commonly 2x to 3.5x | Amortization and a coverage covenant through a slow year |
| Revolver | Materials and receivables through the season | Borrowing-base treatment of retainage and claim receivables |
| Delayed-draw term loan | Funds add-on roofers in new markets | Pro forma leverage tests on each add-on |
| Unitranche | One loan where more leverage is needed | A higher blended rate and call protection |
| Earnout or seller note | Bridges a storm-year price to a normal-year loan | Subordination and payment conditions the lender sets |
| Equity and rollover | The cushion lenders size against in a cyclical trade | Lenders expect more of it where storm work is large |
Because a roofer's hard assets are modest, the purchase is mostly goodwill; see financing a purchase that is mostly goodwill. Roofing is also an active roll-up trade, and the mechanics of adding companies after the platform are in financing add-on acquisitions. The choice between one larger loan and a senior loan with a subordinated layer is in senior debt vs unitranche. A company this size has usually outgrown SBA financing, whose 7(a) loans go up to $5 million.
Building the roofing file
For the term loan, lenders start with the P&L, the balance sheet and the debt schedule, with a year-to-date P&L through the last month-end and an AP aging where available. A revolver adds an AR aging by customer with days outstanding. An acquisition adds the target's latest full year of figures for every company being bought, never an older year, and the letter of intent. For a roofer, expect requests for:
- Revenue and gross margin by type of work for each year, with storm work shown separately.
- A job list for the latest year with customer, type, contract value and margin, and the current backlog.
- Service and maintenance agreements, and revenue from repeat building owners.
- How crews are engaged, with subcontractor agreements and certificates of insurance.
- Insurance policies, loss runs and safety records.
- Warranty claims history, manufacturer certifications, licenses and qualifiers, and the bonding line.
Senior bankers run every Midas Partners engagement. Once the documents are in, Midas Partners builds the financing model, lender presentation, blind teaser and underwriting memo in a day, with the normalized year laid out beside the actual ones so no lender has to reconstruct it; built by hand the same package takes at least a week. Software does the analyst work and a senior banker checks every page before the client approves it. See the package.
Common questions
- Will a lender count storm revenue?
- Partly, and only with evidence. Lenders look at every year and ask what an ordinary year earns. A company that has done storm work in most years gets more credit for it than one whose revenue jumped after a single event.
- Is commercial roofing easier to finance than residential?
- Usually, where the commercial work is service, maintenance and reroofing for repeat owners. That revenue is non-discretionary and recurs. New construction work is more cyclical and carries retainage, so lenders weigh it less.
- Do subcontracted crews make a roofing company harder to finance?
- Not in itself. Lenders want to know that the crews will keep working for the new owner and that they are properly classified and insured. Crews loyal to the founder personally are the harder case.
- Can an earnout bridge a storm-year price?
- Yes, with conventional acquisition debt. The senior lender will require the earnout to sit behind its loan and be paid only while the covenants are met. A seller note is the other common bridge.
- What happens to customer deposits at closing?
- They are money paid for work the buyer will now do. The purchase agreement should pass the cash to the buyer or reduce the price by the same amount, usually through the working capital adjustment.