The M&A Market for Flooring and Interiors is on the Rebound – Some Further Risks to Materialize in 2024 with Significant Upside in the Second Half
After a down year in 2023, most operators are looking forward to returning to growth this year. Acquirers in the market, after focusing on integration, operations, and inventory management last year, are returning to the M&A market and looking to be active this year. Investors continue to be focused on installation services, which saw significant activity in 2023, and wholesale distribution. These buyers are getting more aggressive as economic conditions stabilize, and we expect increased competition among bidders this year to drive premium valuations.
As a trusted advisor to owners and executives in the Flooring & Interiors space, we leverage our unmatched industry knowledge and M&A expertise to achieve best-in-class outcomes for founders and owners. We welcome a confidential conversation to discuss your options and strategy in this rapidly consolidating market.
- Industry headwinds in 2023 hampered M&A activity in the distribution sector, leading to meaningful pent-up demand. Record high mortgage rates, volatile inflation and economic uncertainty hurt performance for wholesale distributors in 2023, coming off the COVID/post-COVID boom years. Most potential sellers were unwilling or unable to go to market last year, and buyers were focused on capital preservation and maintaining existing business. With new home starts recovering and inflation moderating, performance in 2024 should comp well to last year. Buyers are looking to turn on the M&A spigot and jump-start the inorganic growth that they were forced to put on hold last year.
- Installation services bucked the 2023 trend and activity should continue at a rapid pace. In the multifamily market, buyers continue to be active with no signs of slowing down in the tenant turnover / relay business. The massive amount of multifamily construction continuing to come online represents a growing installed based for these service providers, and consolidation of developers and property managers will continue to drive installers to get bigger and grow with their customers.
- Single family remodel market remains challenged but is poised for a significant rebound. Homeowners continue to be disciplined in their remodel spend and have deferred many projects until they feel better about the economy. Mortgage rate lock-in effects remain a governor on existing home sales which tend to drive a lot of remodel activity. However, there are reasons for optimism. Project deferral means there is huge pent-up demand when consumers return to the remodel market. Homeowners continue to have access to record home equity that can fund moderate and large dollar remodel projects. Moreover, many homeowners who purchased in a tight inventory market in 2021 or 2022 are dissatisfied with their finishes, and will look to make upgrades even while they stay in their existing home with low fixed rate mortgages. We expect mid-ticket flooring and surfaces projects to lead the way in this recovery later this year.
- Risks to new construction remain in the multifamily and commercial end-markets. Commercial construction (excluding office) outpaced residential last year and was an excellent source of diversification for companies who serve both markets. We believe new commercial construction likely peaked last year, with higher financing costs and a bit of hangover from 2023’s excellent year likely to take their toll in the coming months. While existing backlog will carry some installers through much of 2024, the replacement of that backlog will likely slow down by the second half of this year if not earlier. Multifamily is a similar story – already started projects will continue to provide revenue for interiors suppliers and installers, but new start activity is likely to be down 25% or more this year.
- Remaining independent continues to become more and more challenging. Running any business is not easy, but the past several years’ volatility in rates, pricing, shipping & logistics, and demand swings have made it even more difficult. Considering a sale of your independent business not only represents an opportunity to monetize years’ worth of hard work and business building, but can also set up your company for further growth and success and better position your ongoing business to weather the increasingly wild swings in the industry.
- Multiple flexible avenues remain for potential sellers. Whether you are looking for a full exit from the business, a partial exit while maintaining a meaningful ownership position, an ongoing operational role, or a clean break, there is a transaction type and a buyer for you. As more acquirers return to the market, they are competing not only on price, but terms as well, allowing sellers flexibility in how deals are structured.
- Preparation remains paramount. It takes approximately 6 months from start to finish to complete a private sale in the industry, but at Anchor Peabody our work often starts much earlier. The more preparation time the better the outcome. Understanding the company strategy, the management team and bench, the strength of the finance and accounting team, the growth plan and its defensibility are all key to achieving a successful transaction. We work with potential sellers months and sometimes years before the ultimately plan to go to market.
Coverings 2024 – Atlanta: If you are in tile & stone business, we’d love to see you at Coverings 2024 in Atlanta this year. If you’re interested in an on or off-site meeting, please reach out to me at [email protected] or call at 917.520.2256