A few companies consistently set themselves apart from the rest, achieving what appear to be outsized growth and returns that attract strong attention from multiple generations of private equity investors. Harris Williams has worked with several such companies over the years. Most recently, the firm’s experience with two clients has solidified our view of the specific value drivers behind their remarkable results.
Packers Sanitation Services Inc. (PSSI) has made a name for itself by cleaning up after others. It provides mission-critical plant cleaning, sanitation, and compliance services to the growing food processing industry. Veritext helps smooth the legal process, with a suite of deposition solutions for civil litigation.
While these two companies provide dramatically disparate offerings and sell to entirely different customer bases, they have two things in common: They are both serial private equity success stories, and they have both just closed on their third Harris Williams-led M&A transaction.
“PSSI and Veritext have generated such strong returns over time because they share four key traits which make them ideally suited for private equity,” says Derek Lewis, managing director of Harris Williams’ Business Services Group.
In this article, Lewis and several colleagues discuss these four traits, and explain their impacts on value creation for private equity investors.
Trait One: Predictable Revenue
All else being equal, the more predictable a company’s revenue is, the more valuable the company will be. Both PSSI and Veritext exemplify this quality.
PSSI’s business is built around contracted revenue: The company has long-term contracts ranging from 2 to 10 years with food processing plants across the country. Veritext enjoys strong repeat revenue: The vast majority of Veritext clients will use its services multiple times in a given year, despite a lack of contracts or formal commitments.
Predictable revenue is especially beneficial when it comes from a large and diverse customer base, reducing the risk of a major impact to revenue from any single customer spending less. PSSI’s top 10 locations represent only 16% of its total revenue, while Veritext’s top ten clients represent less than 10%.
“With a very large customer base, demand may vary from customer to customer in a given year, but in the aggregate, overall revenue remains relatively constant,” notes Bob Baltimore, a managing director in the Business Services Group.
Trait Two: Non-discretionary Demand
Companies that provide non-discretionary, often regulatory- or compliance-driven services, are much less likely to be negatively impacted by economic cycles. Both PSSI and Veritext fit this profile, providing essential services to their clients that they must purchase in order to conduct business.
For instance, many of the processing plants that PSSI serves are required to be cleaned daily, and they often must be inspected by a USDA official before resuming operations the following day. If the plant’s cleanliness does not meet required standards, it cannot operate. These regulations are applicable regardless of the volume a plant produces in a day.
Likewise, depositions are a required part of the civil litigation process. A witness cannot be called to testify in a trial if that witness has not first been deposed by the plaintiff and the defense attorneys. Furthermore, since civil litigation is not tied to the economy, the need for depositions remains steady.
One additional factor fosters steady revenue for both companies: The cost of the services they provide are a fraction of the customers’ overall costs of operating. The cost of a deposition is small, compared to the cost of attorneys’ billable time, so clients are much more focused on quality, reliability and convenience than on the unit cost of a single deposition. Likewise, the potential lost revenue to a food processing plant, if it cannot operate, is much greater than the cost of cleaning the plant.
Trait Three: Advantages of Scale
PSSI and Veritext both started as businesses operating locally on a small scale. Both successfully scaled their operations to become the leading national players in their respective sectors. As a result, they have been able to capture the benefits of scale.
“Customers across industries are increasingly looking for service providers that can operate on a national or global scale, and be a single-source solution,” says Brian Lucas, managing director in the Business Services Group. “Such companies are more likely to capture a larger share of their clients’ spend.”
One of the reasons Veritext enjoys strong repeat business is that it has the resources and market coverage to service depositions for clients, regardless of when or where they occur. “Veritext will always say, when asked if they can schedule a deposition, ‘Yes, we can, no problem,’” says Anthony Basmajian, a director in the Business Services Group.
Scale also enables these two companies to re-invest in their businesses, which allows them to enhance the customer experience while delivering their services more efficiently. Veritext, throughout its history, has been at the forefront of developing unique tools such as virtual depositions, snap scheduling, exhibit share and exhibit scheduling, all of which enhance client loyalty and profitability.
Another key part of the equation is the labor pool: finding the people who can perform the work required. Both PSSI and Veritext excel at this: “Because of their size, both companies have been able to consistently hire the right employees or source the right contractors,” noted Lucas.
But managing a function that’s performed by teams of people in hundreds of different places across the country every day isn’t easy. It requires systems, infrastructure, and processes to do well. “Both PSSI and Veritext have figured out how to do this at scale, which is a significant barrier to entry to less-capable competitors,” said Baltimore.
Trait Four: Commitment to Growth
Most companies desire growth. A few, including PSSI and Veritext, commit to it at the highest levels.
For one thing, both companies have strong sales teams that continually focus on ways to build, nurture and strengthen client relationships. Both have also made ongoing commitments to improving these teams as the companies have grown. Specifically, they have retained sales people who are highly effective at managing client relationships, and they have brought on new sales people, trained them, and helped them build their own relationships. Each company has also recently hired new sales leaders to help keep pace with their growth ambitions.
Both companies are highly acquisitive as well, which has helped them continue to build scale in their core markets and bring on new capabilities that enable them to serve those markets better. PSSI, for example, has acquired several leading cleaning and sanitation players serving the protein-processing market, while Veritext has made more than 60 acquisitions over 20 years to help fuel its growth.
“Veritext’s management team has created enormous value for the company,” said Lewis. “The team has a vision for the future, proactively creates its growth plan, executes it, and pivots when and where it needs to.”
“These are companies that have partnered with private equity, and each time they do so, they have been successful. Veritext and PSSI are the largest in their respective industries by revenue,” continued Lewis. “And still, the CEOs are saying, ‘For us to continue to grow and be the best, what do we have to change?’”
Given such a strong foundation, the next owners of PSSI and Veritext have an opportunity to turbocharge these companies’ growth, which could include international expansion. “Both businesses have the foundation to really accelerate from this point, and the private equity investor now will be a crucial partner in that regard,” said Lucas.
What sets serial private equity success stories apart from other companies? Across industries, four key traits emerge: predictable revenue, non-discretionary services at attractive prices, a mastery of the opportunities provided by scale, and an embedded commitment to growth.
“While these are straightforward qualities to look for, they can be difficult to find together in one company,” says Lewis. “Those businesses boasting all four should capture the focused attention of investors across industries and disciplines.”
Track Record of Success with Long-Term Client Relationships
Select companies for which Harris Wiliams has advised on multiple transactions:
Published October 2018