Consolidation isn’t new to the industry. After all, the Big 3 didn’t become the Big 3 by happenstance. Nor did PoolCorp grow organically into the juggernaut it is.

But it’s been mostly reserved for manufacturers and distributors. For years, some observers have called for the same to occur with the industry’s consumer-direct segments — service firms, builders and retailers. And it’s finally happening. Private equity and other investors are buying service companies and now builders at a rapid pace as COVID-related demand has put the pool market on the radar. Here, we take a look at how this happened.

Historic phenomenon

Private investors and their new aggregating ventures dominated the headlines in 2021.

Through at least three companies acquiring service firms throughout the Sunbelt, and another bringing together builders in Texas, outside investors have made a big impact in the last year or so.

And the quick rate of acquisitions demonstrated by some has shown that their work won’t die down this year. In fact, observers don’t expect the activity to stop just with the investors who’ve already made their presence known.

“I’ve been told by a variety of sources that there are more than 20 different private equity firms that are looking around within the industry and have their feelers out for any number of acquisitions,” says Dennis Marunde, president of Arvidson Pools & Spas, headquartered in Crystal Lake, Ill., with multiple locations serving metro Chicago and Southern Wisconsin.

As a national retail and service company, Poolwerx is seeing the same level of interest firsthand.

“The amount of calls I get from analysts looking for data on the entire pool sector, not just retail and service, is extraordinary,” says Troy Hazard, non-executive director of the company, whose U.S. headquarters are located in Dallas. “That’s a good sign that people are looking to invest in everybody’s future.”

Generally speaking, private equity firms and other investors tend to gravitate toward recurring income, leading them more often to the service and retail sectors of the pool/spa industry, since they serve the aftermarket.

These investors are looking for heavy-hitters in their respective markets. They especially seek out rock stars when they’re trying to establish roots in a particular market or industry. National Pool Partners began by acquiring Austin, Texas-based Patriot Pool & Spa, a well-known company to fellow service professionals around the country. Another recent aggregator entered the building sector by purchasing Riverbend Sandler Pools, a Dallas-area institution. It then followed up with two more in the same metro — the century-old Pulliam Pools and 35-year old Claffey Pools.

These companies need to be big performers. Based on discussions with other companies that have been approached by private equity or have pursued a sale, Marunde said that private equity investors are looking for sales volumes starting at $10 million and EBITDA of more than $500,000, preferably closer to the $1 million to $2 million range.

Some are willing to pay top dollar to enlist these standouts. Without specifics, multiple industry sources said some of the sellers are receiving significantly higher than normal multiples of their EBITDA.

“There’s such an explosion of interest in our industry right now that ... when [these firms] see something that they want, they have the resources and a longer-term plan, they’re willing to pay a higher valuation,” Marunde says.

Companies usually will do that for two reasons, Hazard says. “One is a desire to get into the sector — I’ll pay a little more for it because it gives me a platform to build on,” he says. “The second [reason] is, I’ll pay a good multiple for that business because I can see the value that it already has and that I can capitalize on.”

But for these investors, it’s not enough merely to enter the industry. They’re making acquisitions at a high rate to safeguard them for the future.

On the manufacturing side, we see a number of companies not only boosting their acquisitions, but also taking their companies public. In addition to factors such as high demand and easy access to funds, Brian Quint credits this in part to the success that mega-distributor PoolCorp has had after going public in 1995 and consolidating a large portion of that industry segment.

And while these companies have enjoyed the growth resulting from the pandemic-driven demand, they have to think about what happens after that wave cycles out. To prepare themselves for the long term, they are joining many companies together.

“The pandemic has given us that boost for now, but we’re going to have to keep that trajectory going,” says Quint, former owner and now a special projects manager for Seattle-based Aqua-Quip. He sold the company to Leslie’s in 2019.

“They’re going to have to grow revenue and profit — and EBITDA specifically. The way they’re trying to do that as the industry digests the pandemic impact is [by] going out and bolting on more businesses together to get more revenue and EBITDA performance.”

This makes sense for public companies or those supported by private equity, especially since the latter sometimes convert over to publicly traded entities as a way for the private-equity investor to exit.

Exit Strategy

It seems that if you work in the industry, you probably know somebody who’s considering selling. Marunde and other well-connected professionals report knowing several dealers who are deep enough into negotiations that they’ve signed the non-disclosure agreements needed before performing due diligence.

A fair majority of company owners are baby boomers, many with sights to retire in the near future. Some have stayed with the business longer than planned because of the pandemic or the economic downturn of 2008-2010. With the pandemic, they’ve seen more business than ever, plus the assistance of Paycheck Protection Program in 2020.

“Now you’ve got aging baby boomers sitting on more cash than they’ve ever sat on before, and they’re saying, ‘This is amazing, but I don’t ever want to go through that again,’” Quint says.

Consolidators are presenting their ventures as just the answer to these industry veterans. Besides that, many expect this consolidation trend to change the look of the industry in fairly short order.

And while many questions remain unanswered as to exactly how the industry will change, observers expect builders, retailer and service professionals to face something of a fork in the road: To join or not to join?

“At some juncture everybody’s going to need to make a decision as to which journey they want to be on — stay the course in what you’re doing, maybe join a franchise, maybe sell the business to a consolidator,” Hazard says. “All three options are suitable to your family journey and what you want from that, but at some point, people are going to have to do something, or maybe get left behind.”

The consolidation tide may try to pull in as many companies as possible, leaving one to wonder how much room will be left for independent operators. Industry professionals differ in their expectations.

“It might be more difficult for them to stay in business and compete, but I think there are always going to be niche opportunities for people,” Marunde says.

Smaller companies may be more naturally suited to provide a customized experience for those customers who seek that out. “They know their customers’ pools and idiosyncrasies, and how they want to be talked to,” he says. “You may not be able to scale that, but you certainly have plenty of opportunity to make a very decent living.”

He especially sees an opening for sole proprietors in the service industry — the self-employed, as opposed to business owners. “I think there’s an opportunity ... that will be very satisfying to a certain segment of consumers who want their own private pool person,” he says.

But one thing’s for certain: The industry will see plenty of soul searching in the immediate future.

“I think there are going to be a lot of people sitting around in the backyard with their families going, ‘Wow, what do we do next?’” Hazard says. “And that’s a good thing.”