Towing businesses - PE interest?
The towing industry seems interesting - very fragmented, recurring government contracts, decent margins and industry was growing at about 2x GDP prior to COVID-19. HOWEVER... there is very little PE activity in the towing/car recovery industry as I’ve searched all the transaction databases and find very little (almost dormant) activity from PE. I want to take a deeper dive into the industry but the lack of activity makes me wonder if there is a reason for it and everyone else knows something I don’t? Anyone have experience in the space or evaluated a deal or the industry? Very grateful for any feedback.
Similar to HVAC I'd imagine, tough work to roll up a bunch of one man shops
You're correct in that the overwhelming majority are single-man operators. However, from industry research and doing some googling the industry has over a few thousand regional players with $1m+ in revenue. A lot of the business broker websites show regional shops doing $1m-$3m topline and $300k-$1m in SDE/EBITDA (I know bad proxy). I spent time exploring HVAC and the industry has significant PE and strategic activity...
It may seem silly, but you'd also have to consider the geographies you'd be playing in for fear of interacting with the wrong crowd. This is due to towing businesses being associated with organized crime groups given the relative ease of money laundering. For example, Toronto has an extremely brutal tow truck war that has been going for years - attacks range from murder to vandalism. Oddly fascinating if you have time to dig into it.
Not silly at all, you make some valid points. I've thought about this a bit and I take a rather counter position. If you take a step back and consider that garbage/waste removal was in a similar predicament (mobbed up) those problems have since largely been eradicated as politicians and wall street stepped-in and "legitimized" the industry to a great extent. There still is some stigma attached to the industry but the legitimacy of it is enough to attract capital markets and institutional investors. Now we have conglomerate "rollups" such as Waste Management and Republic Services that are majority owned by index and pension funds.
I don't see why this couldn't be done with towing, granted on a smaller scale (industry is about $8bn-$9bn in US).
The case study of waste removal is certainly interesting and a great point, although I do wonder what sort of hurdles they may have (and possibly/likely still do) when it comes to dealing with competitors that are in organized crime.
I don't dispute that the towing business can be legitimized for the purpose of attracting institutional investors, just like waste removal. Heck, even cannabis has become legitimized for many institutions. However, with the issue of attracting capital aside, I'm still curious how you'd deal with the operational issues of potential run-ins with these mob groups? Do you just flag the regions that have serious issues (e.g. Toronto) and stay out? I'd be curious to know how the waste removal roll-ups have tackled this issue. Perhaps I am overestimating the amount of criminal organizations involved in this business, at which point avoiding certain regions would be a viable strategy. Regardless it's an interesting topic to diligence.
HVAC is a bit different though IMO - highly technical and very scarce labor force. Avg age of an HVAC tech has been rapidly rising and I think that perceived value has spurred a lot of the PE activity. Roll-up makes a ton of sense on the commercial side if you can deliver that valuable labor pool across a customer's portfolio.
My perception of tow trucking is very low barrier besides the capital investment in the truck itself. Would be curious to hear others' thoughts.
Interesting, specifically regarding your HVAC labor points. Towing's barriers to entry aren't as high as say HVAC because you do not need to go to school and obtain certification. There are some license requirements in a number of jurisdictions which requires advanced licensing and training... so I push back a bit on "very low barriers to entry" as the industries I categorize as very low barrier to entry are more aligned to minimum wage workers with no licensing requirements such as jan/san cleaning services etc.
Additionally - capex requirements aren't as intense as one might intuitively think because the trucks can be structured as leases and do not have much ware and tear because they tend to stay in local boundaries unlike trucking where capex and maintenance becomes expensive due to the constant running and long-haul nature of that industry.
Thanks for the idea!
lol Happy to share! I think long-term if some does this correctly it could be similar to collision repair shops where you can acquire these consolidate mom and pop shops. Boyd Group Services (BYD.TO) did this in that industry and became the 2nd best performing stock on the TSX. Formula = Acquire for 3x-3.5x EBITDA and stitch together a platform.
If you really want to do this and could live off like $50k a year while you do the legwork PM me.
Hello I recently purchased a towing company and looking into buying a second one. I would like your feedback?
New to platform. Cant send PM for 2 days. How is best way to connect?
Main questions I would have are capital intensity and differentiation / benefits to scale
Recap to previous capex response: Capex requirements fall somewhere in the middle of the pack ie. not a service business with minimal capex nor a heavy capex business like trucking LTL/TL as the wear and tear is rather minimal due to the localized routes and downtime between tows as the trucks are not in constant motion unlike trucking for example which there is very little downtime. Additionally, you can get creative with leases as well. The main risk associated with the fleet is gas prices not PP&E or heavy maintenance capex, which I'm sure you can hedge out to a great extent if one becomes very worried about gas price vol.
Benefits to scale - Most of these businesses are very regional so centralizing a very standard service offering like towing helps with efficiencies and cuts down on administrative count for example. Additionally, integration should theoretically be quite simple as it is essentially just rebranding a similar service offering. I view M&A in towing as the less risky alternative to organic growth as you do not need to invest and gamble on new locations panning out but can purchase existing locations with existing contracts at low multiples (3x-3.5x).
Hopefully that makes sense, it's been a long week.
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