Formed in 1996, Contractor First LLC provides merger and acquisition, investment banking, and intermediary, business brokerage and consulting services to middle-market contracting companies in HVAC, plumbing, mechanical, refrigeration, electrical, data & cable, facility services and maintenance, and telecommunications.

Contractor First has assisted more than 50 contracting companies who have sold to various national and regional buyers. Clients range in size from $2 million to $120 million in annual revenues. The combined revenue of the 50 companies Contractor First has represented in acquisitions is approaching $1 billion.

PM: Describe the business of Contractor First.

Price: Contractor First's main practice helps business owners seek-out and merge with buyers that possess a philosophy matching our client's business strategy. We strongly believe that when it comes to selling your business, "Who?" may be a far more important question than "How much?"

For example, too many owners waste their time with poorly qualified buyer candidates such as a local competitor or current employees. That's time that may be spent prospecting for candidates with significant financial resources. These buyers will be more interested in the economic benefits and synergistic benefits of a merger than having access to your proprietary documents.

Contractor First does not assume that consolidation is appropriate for every business. Our staff spends a lot of time working with our clients in an evaluation process to determine if the sale or merger of the business is the right move. It is our practice to present client companies only to qualified and serious prospective buyers. Our staff is knowledgeable about numerous acquiring entities, their acquisition strategy within a region, and exactly what business-mix for which each buyer is looking. This saves time and helps ensure confidentiality is maintained.

During a transaction, Contractor First serves as the contractor's exclusive consultant evaluating the business, finding individuals or entities that may wish to purchase the business, making recommendations regarding prospective buyers, and assisting in negotiating transaction terms. Contractor First charges no up-front fees for these services. If we deliver a purchaser and our contractor/client finds the purchaser's terms satisfactory, our fee is then based upon a percentage of the purchase price.

PM: If I were a PHC contractor looking to sell my business and gave you a call, what are the questions you would ask to qualify me as a potential client?

Price: Since Contractor First charges no up-front fees for our services, and we get paid only after a transaction is complete based on a percentage of the sales price, we must be extremely selective in the clients with whom we choose to work. The first questions relate to annual revenue, business mix and quality of the earnings. We look for companies with a strong earnings history and annual revenue in excess of $2 million with a significant portion of the revenue to be service-oriented. We also focus on the strengths of the management team, the culture of the business, and the services offered by the company.

PM: Explain EBITDA to our readers and tell why it's important to Wall Street investors.

Price: EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. It can be calculated by taking the net income of an entity and "adding back" to it net interest expense, taxes, depreciation and amortization costs. EBITDA is the cornerstone for figuring out what a company is worth. It is the magic number that becomes the key factor in the valuation process for figuring the potential purchase price.

Wall Street uses it as a measure of cash flow from the business, and some investors calculate their return on investment (ROI) based on EBITDA. Others use a simplified version, EBIT, which stand for Earnings Before Interest and Taxes only.

In the sale of a company, an owner should know his EBITDA number as well as his/her "Adjusted EBITDA." Add-backs are expenses or costs that private businesses incur that may not be made if the business is owned by a public company. Many of these expenses are incurred to minimize the amount of income tax paid.

A public company seeks to maximize reported profits and therefore does not employ a tax minimization strategy. By adding back these reported expenses to the company's bottom line or its adjusted EBITDA, higher earnings will be shown, therefore resulting in a higher sales price for the company.

PM: Besides EBITDA, what other factors make a contracting business attractive to a consolidator?

Price: While we work with both union and nonunion contractors, the national and regional buyers of a PHC company have their preferences. Some prefer to invest in unionized firms and some prefer to invest in nonunion firms. If you are a unionized contractor, or vice-versa, you will be wasting your time if you do not first find out whether or not the buyer has a preference in this area.

Buyers like to know if the business is an "annuity business," a business with consistent and steady growth and little dependency on external factors such as the weather, a single client or construction starts. Buyers also like to look at the management team. Most buyers hope to purchase not only a going concern with trucks and inventory, they also hope to retain the human capital such as staff and key management leaders. It is a real positive if the team in place is stable and proven.

Beyond the depth of the team, acquiring entities like to see that there is a long-term strategy in place for the business' continued growth. An in-place and active sales and marketing strategy is another plus.

PM: Obviously, size is an important factor in determining acquisition targets. But our industry is populated by a bunch of small companies, even one-man shops, doing less than $500,000 a year in revenues. What opportunities exist for these small contractors to sell their businesses?

Price: Those companies that do not meet the consolidators' revenue hurdles have numerous options. First, of course, they can stay independent. Whether they stay independent or elect to join a national or regional buyer in the future, I strongly recommend that the contractor consider joining a "best practices" peer group as a way of continuing to improve their business. Examples of these groups are Contractors 2000, Service Thrust Organization or Excellence Alliance.

Second, contractors may seek alliances with manufacturers and dealers for help in marketing, training and field consultations.

Third, a contractor can choose to merge with a local business. The best matches are two companies in the same region, which possess complementary features. The management of each company can work together for a time and then consider selling on the basis of their combined revenues. Contractor First has been involved with the combination and later sale of two small companies (about $2 million revenues each). It was proven that the businesses were worth more consolidated than as separate entities.

PM: Acquisitions activity has slowed considerably. Is this solely because of declining stock prices for the public consolidators, or are there other reasons?

Price: Acquisition activity has slowed for the original public consolidators, which is a result of their focus more on integration than acquisitions, and a function of their poor price-to-earnings (P/E) ratios (current market price of a company's equity shares divided by earnings per share).

However, Contractor First is aware of more than 20 potential regional and national buyers of PHC contractors. Many of these buyers have not yet revealed their presence to the industry, but have indicated their interests to Contractor First. Because of this buying activity we are busier than ever. Currently, we have more than a dozen contracting companies who are in the advanced stages of the acquisition process.

Utility deregulation along with potential changes in accounting treatment for mergers and acquisitions transactions are driving current activity.

PM: Why has Wall Street soured on the public consolidators?

Price: Wall Street has soured on the public consolidators because they missed their aggressive earnings targets. Integration issues have taken the forefront over acquisitions for these consolidators.

PM: Will roll-up IPOs (initial public offers of stock) come back into favor for the PHC industry? If not, what will happen to Blue Dot., AMPAM and other would-be PHC consolidators who have expressed intent to go public but have postponed it until the market seems more receptive?

Price: Roll-ups are out and buy and builds, or "B&Bs," are in. B&B corporations are in an enviable position. Blue Dot., for example, has a strong backing in Northwestern Growth Corp. to continue acquisitions, while focusing on integration without having to directly report to Wall Street. When and if it decides to go public, its story will be much different than the roll-up scenario - it will be considered an operating entity, or a B&B.

PM: Where do utility companies such as PSEG, PP&L, Connectiv, Keyspan and Unicom - all of which have bought up some large mechanical contractors on a regional basis - fit into the picture?

Price: Most utility companies' strategy is to build a strong regional presence. Some are focused on residential and light commercial contracting, whereas the others have focused more on the large mechanical contractors. This is all a direct result of deregulation and each utility's reevaluation of its core business strategy. The utilities believe that by buying the mechanical contractors they can acquire quickly the capabilities needed to expand into new product or geographic markets. These utilities seek to provide other services through "bundled product offerings" that cross industry lines as regulatory constraints are lowered.

PM: Is there anything going on with consolidation that has not generally been reported in the trade press?

Price: Yes. The regional consolidations, such as what the utility Washington Gas & Electric is doing in the metropolitan Washington, D.C., area with Primary Service Group LLC, and the facilities maintenance and residential conglomerate companies such as OMNI Facility Services Group, and Consolidated Engineering Services, a Charles E. Smith company. With more than 20 potential buyers of a PHC company, contractor liquidity options are numerous, complex and stronger than ever. The contractor is well advised to consider the services of a professional mergers and acquisitions consulting firm in exploring a divestiture strategy.

PM: Can you give us any predictions for the future?

Price: Look for no slowing in the buying activity - just look for it to be on a different level than it was before. The utilities, manufacturers, facility management companies and B&Bs will all be buyers of significance. Also, look for more consolidation of the original consolidators.

Michael Price can be reached at 800/538-0415,