How Can Independent Home Improvement Companies Compete with Private Equity?

Jon Erksine has a clear statement on the topic of private equity companies entering the home improvement market. “Be my competition,” he says. The vice president of Alenco, a Lenexa, Kansas-based replacement contractor, is invigorated by the challenge. “[It] will only help my business,” he adds.

Given what’s happening in the market, there is no doubt that Erksine will get his wish. And while Alenco might be in a good position to go head to head against PE-backed competitors (the company has 50 employees and saw $30 million in revenue for 2021) remodelers with a smaller footprint might not feel so bold.

Historically, the home improvement industry has been a highly fragmented market, but that’s all changing in a dizzying wave of buyouts and consolidation. Many larger independent companies have sold to PE investors, and new deals pop up seemingly every day. (See timeline)

Moreover, as the acquisition trend gets hotter, it’s no longer only the largest companies getting approached by investors hungry for a buy. In the past, a home improvement firm needed about $20 million in annual revenue before PE firms would come calling, but as more businesses get gobbled up, that number is getting smaller, according to industry insiders.

Now many home improvement business owners face a choice: remain independent and compete or take the massive influx of funds and resources that come with PE investment. But before owners can decide, there are questions about the advantages of PE investment and how companies that want to remain independent can hope to compete.

The Upside

There are multiple reasons why a company might pursue a private equity acquisition. One major benefit is the “sophisticated financial acumen and best practices development” brought in by the purchasing firm said Abbe Will in a 2020 Pro Remodeler article. Will is part of the Remodeling Futures Program at Harvard’s Joint Center for Housing Studies and has studied PE’s presence in the market since 2014.

PE-funded home improvement company Leaf Home is one example. In late 2021, the firm brought on a new CEO, Jeffrey Housenbold, whose prior roles include a stint at the helm of Shutterfly as well as a founding managing partner with Softbank where he was partly responsible for $130 billion in assets. Leaf Home has 2,200 employees in 152 locations and calls itself the “acquirer of choice.”

Private equity purchases also provide an attractive retirement option. “For small business owners in our space, this gives them an exit plan, if they set their company up right,” says Mark McClanahan, president of St. Louis-based remodeler Mosby Building Arts, which has an annual revenue exceeding $12.5 million.

Part of that “setting up” for company owners means creating documented, scalable processes that position a firm for growth and can be utilized by new owners.

“Build something that’s repeatable, write down every process, make every process a checklist, and become a bigger and bigger company,” advises Brian Elias, founder of home improvement company 1-800-HANSONS, which he sold to private equity in 2017 after building its worth to $75 million. Elias now owns home improvement supplier Refloor.

Other Perspectives

The shiny new funding and business smarts that accompany a PE purchase can catapult a business forward, but that growth can also come at a price.

Most home improvement companies were founded by a single entrepreneur who is used to making the final call on all decisions, from company culture to pricing strategy. If that leader stays on after the acquisition, they could have a tough time giving up that control.

Jobs present another issue. PE investment creates growth, which means adding more team members throughout the company. Yet there are often losses in certain positions after a business is purchased.

“Even though the company is expanding, those [job losses] are typically in the areas that they would centralize the work,” explains Rob Levin, former president of Statewide Remodeling, Texas’ largest remodeler, which was acquired in 2019 by Titan Holdings. “They create jobs by expanding, but then again, when they’re acquiring, they’re going to be having people on the local side who will be losing their jobs.”

This is because some departments—HR, marketing, and accounting, for example— are frequently centralized, meaning that it’s no longer necessary to have people in those jobs at the local level. This can be hard for an owner with longtime, loyal employees.

Remaining independent is a part of Alenco’s company culture, says Erskine. “One of the best parts of our culture is the people here don’t have to worry about [private equity],” he explains. “It’s not lip service when we say our growth is for us, so everybody can eat more, we can provide more jobs, and ultimately, this is our business, we are not the caretaker for a private equity company.”

Using PE’s Investment For Your Gain

So, what if you’re a family-owned home improvement company and selling to PE investors isn’t in the cards? Maybe you’re too small to catch their eye, or maybe you prefer to stay independent. The question now is how do you compete? Your footprint isn’t as large and you don’t have seemingly unlimited funds to devote to marketing.

in advertising.

If an acquired company buys a billboard or digital marketing, a percentage of homeowners will be inspired to start remodeling projects, but not necessarily with that company. Instead, they’ll begin researching home improvement in general, and that’s where local firms can distinguish themselves.

Steve Rennekamp, owner of Energy Swing Windows in Pennsylvania, credits his success to a prominent local presence, more than 500 five-star reviews, and industry awards. All of these can help local companies stand out from the crowd as interest in home improvement surges.

Technological Flexibility

While any company, PE-funded or family-owned, can invest in new technology, recently acquired firms can invest in the newest solutions to help streamline marketing, sales, and installation. Tech literacy is game-changing for the home improvement industry because of the evolving generational demographics.

“Millennials are the first truly digital age,” says Kate Ratcliffe, marketing manager for Leap, a software company serving the home improvement industry. Like many, she believes that the market will soon belong to the generation that grew up with technology at their fingertips.

However, investment in new software on a large scale can be a challenge for smaller companies. Yet, at the same time, smaller businesses are more nimble, and if one strategy doesn’t help them grow, they can quickly switch to a new one. This concept applies to all types of marketing as well.

The Power of Local Ownership

While technology investment and creative marketing strategies are helpful, one unique power of independent companies is the ability to loudly proclaim they are locally owned. Consumers can know that the money they spend on projects completed by family-owned home improvement companies will flow directly back into their community.

To emphasize this, Energy Swing Windows hosts an annual customer appreciation dinner, where team members can build on customer relationships and express gratitude for the projects they’ve worked on over the past year. Alternatively, Alenco funds programs for underprivileged groups in their community, which not only makes a real impact on people’s lives, it also raises brand awareness.

PE investment is a firmly established trend in home improvement. How smaller companies react going forward is still being determined.

Allyson D’Antonio is a freelance writer based in New York. Erika Mosse is director of content at Pro Remodeler.