It sounds so simple in theory: Private equity firms invest capital and expertise into mature businesses in traditional industries in exchange for an ownership stake—with the goal of increasing the value of a business and eventually selling it for a profit.
Based on that premise, it makes perfect sense that PE firms would be investing in flooring distributors, a very mature and traditional industry that dates to 1936, when William M. Bird first started distributing Armstrong floor coverings.
PE companies like Transom Capital are leading the charge of equity firms buying up or investing in distributors. In October, Transom acquired the Tom Duffy Co.—its third purchase of a flooring distributor within 12 months—merely the latest example in a growing trend of PE’s appetite for distributors.
While relatively new for flooring distribution, private equity has been actively engaged in related industries, including building materials. For example, six of the top 15 building materials distributors are PE-backed, with that industry seeing a trend toward well-capitalized super-regionals and national players.
Flooring distribution is following a similar path. The top four flooring distributors (Artivo Surfaces, UCX, All Surfaces and TriWest) are evolving into super-regional and/or national players in their own right by leveraging acquisitions or private equity money. As of now, two of the top three are PE-backed—All Surfaces (ShoreView Industries) and Artivo Surfaces, which is run by Transom, with more than $1 billion in committed capital. In addition, Center Rock Capital Partners, a division of The Merit Distribution Group, has completed a number of acquisitions in recent years—among them top 20 wholesaler E.J. Welch, along with Dealer’s Supply, Cheney, Inc. and certain assets of Gilford-Johnson Flooring, which at the time was a PE-based top 20 distributor.
Mutually beneficial
Private equity’s move into flooring distribution makes sense on several levels and is mutually beneficial, flooring executives say. For starters, distribution typically has good cash flow and since PE firms finance their operations with heavier debt, cash flow can cover interest and help drive down the debt. “Banks seem to love financing with distribution as the assets to support it are the two biggest drivers with distribution—inventory and receivables,” said Jeff Striegel, president of distributor Elias Wilf, Owings Mills, Md. “[PE] simply loves businesses that can be scaled up, and flooring distribution is right in the pocket in this aspect. Typically, PE can also remove a lot of internal cost as it relates to the backroom part of these companies such as with accounting, HR and executive management. Also, the larger size and scope can also impact operating cost such as trucking, computerization and a host of operation costs.”
Given the fact that PE firms have excess capital in which to invest—and distributors are coming off a down year— look for this marriage to continue, experts say. “The valuations of many floor covering distributors are still somewhat low based on current business conditions, and those valuations should increase as interest rates come down and business improves,” said Dave White, president of Tri-West Ltd., Santa Fe Springs, Calif.
While PE is naturally drawn to distribution, there are many wholesalers—especially family-owned businesses—that desire private equity because they require capital to truly grow or may lack a sound succession plan.
If anything, COVID-19 played a role in accelerating this dynamic, as the economic events of 2020 and beyond put many distributors in a position to re-evaluate their long-term ambitions—to stay and grow or to sell. “Many distributors have been around for many years, and our industry has a very aging distributor ownership,” said Steve Kleinhans, president of Big D Supply, Phoenix. “Without a comfortable succession plan, distributor owners were ready for a profitable exit strategy. Private equity is probably the most likely place for distribution to find interested buyers at the price points they desire. These are not small business dealings and there are only so many organizations that have the wherewithal to afford [distributors] while having the motivation to pursue them.”
Furthermore, Kleinhans said PE sees floor covering as a robust industry with plenty of financial opportunities. “I think that those outside our industry perceive a lack of refinement [in flooring distribution] where there is an opportunity to create a more efficient operation.”
As the market continues to consolidate, distributors will need a certain scale to remain healthy and grow; otherwise, they will become smaller and niche-focused in order to survive. Those caught in the middle need to strategize accordingly. That’s according to Scott Rozmus, president/CEO of FlorStar Sales, Romeoville, Ill. “People managing outside capital are always looking for industries and companies within those industries that present opportunities for attractive returns,” he said. “PE firms employ some pretty smart folks, and they apparently recognize trends that make floor covering distribution an attractive investment.”
In some instances, the distribution target is a mature company that doesn’t require a major overhaul. As Tri-West’s White noted, “The distributor usually requires some minor technology and personnel changes, along with an infusion of capital to grow the bottom line. If the PE company does its job, they improve the top and bottom lines and can turn a nice profit in three to five years when they sell the company.”
Another option for mature companies is an Employee Stock Ownership Plan (ESOP). In 2023, Eagan, Minn.-based Herregan Distributors transitioned to an ESOP. As an ESOP, Herregan established a trust fund that holds shares of the company on behalf of its employees. The ESOP will provide eligible employees with ownership shares, ensuring they have a vested interest in the company’s performance and long-term viability.
Not all marriages work
While private equity and flooring distribution may be a marriage of convenience, not all marriages last forever or end well. Examples include Gilford-Johnson Flooring, which was acquired by Blue Equity in 2013; Blue Equity “exited” the business in 2022 by selling assets to PE-backed E.J. Welch, which subsequently has closed branches and is rumored to be on the selling block.
Perhaps the best example comes north of the border. Canada’s largest distributor, Shnier, which operationally is under the Gesco Industries umbrella, had a successful run under PE ownership for many years. However, more recently, the PE firm was forced to file under the Canadian version of bankruptcy and sell to a different PE ownership group (Ironbridge Equity Partners).
As one distribution executive with knowledge of the situation explained, “One of the issues with PE firms is that if they are not getting the returns they want or need organically, sometimes some firms might try to achieve or supplement their returns via ‘financial engineering’—taking on lots of debt or otherwise implementing changes to the business that yield short-term results but create problems down the line. In an industry that is cyclical—and in a space within that cyclical industry that is capital intensive, like distribution—the combination of financial engineering + cyclical downturn + impatient ownership and/or bank covenants being breached sometimes yield very unfortunate outcomes.”
