Selling a Water and Wastewater Services Company

What a buyer is paying for

The company might operate small treatment plants for developments and industrial sites, run lift stations and collection systems, pump and haul septic and grease, test backflow devices, sample and report discharge results, or maintain wells and distribution systems for private water companies. Each of these has a different revenue pattern, and a buyer sorts the business by it. Monthly operating contracts are valued above one-time pumping calls. Testing and reporting work that repeats on a schedule is valued above emergency repair work, even though emergency work often pays a better hourly rate.

What the buyer pays for in the end is the stream of contract revenue that continues after the owner leaves, and the confidence that the operators, the permits and the equipment needed to deliver it come along with the company. Our post on recurring revenue and contracts explains why a buyer's lender pays attention to the term and renewal history of every agreement.

The contract book

Buyers will ask for every operating agreement in a schedule that shows the customer, the service, the monthly fee, the start date, the end date, the renewal terms and the termination terms. Some customers are municipal districts or water authorities, some are homeowner associations and mobile home communities, some are food plants, hotels and campgrounds. Public customers usually buy the work through bidding or proposals, and they may be able to rebid the work when the term ends. A buyer wants to know how many contracts reach their end date in the first couple of years after the sale and what the company's history is at renewal.

Contracts with public bodies often contain a clause that requires consent before the work is assigned to a different company, and some require the new company to show equal qualifications. Rules vary by state and your attorney confirms what applies to each contract. Private contracts are easier, though they can be cancelled on short notice, and a buyer will discount any contract that either side can end quickly.

Pricing history matters too. Operators in this field are often locked into fee schedules that were set years ago while chemical, fuel and labor costs have gone up. A buyer will check whether contracts allow annual increases and whether the company has asked for them. A contract book that has been repriced regularly is worth more than one that has sat untouched.

Certified operators and who holds the knowledge

This industry runs on certified people. Treatment plants and distribution systems must be operated by someone holding the right level of operator certification, and the level required depends on the size and type of the system. The certificate belongs to the person and not to the company. If your chief operator leaves, the contracts that depend on that certificate are at risk until you find a replacement who holds the same grade.

Buyers will ask for a roster showing each operator, the certifications and grades they hold, the systems each one is responsible for, their pay, their tenure and when each certificate must be renewed. They will pay particular attention to how many systems depend on one or two people. If the owner holds the highest grade and is the named operator on the largest accounts, the buyer will want that responsibility moved before closing, or an agreement for the owner to stay on in that role for a period. Our post on owner dependency covers how to reduce that risk.

Training and succession deserve attention. Operators are hard to hire in most areas, and a company with a trainee coming up through the grades, or a relationship with a community college program, looks stronger to a buyer.

Trucks, equipment and what they cost to keep running

A pumping and hauling company has a fleet of vacuum trucks, jetting trucks, camera trucks and trailers. A treatment operator has portable pumps, sampling equipment, meters, chemical feed systems and a service van for each route. Buyers want an equipment schedule with the year, make, mileage or hours, condition, any liens, and how the truck is used. They will look at maintenance records and compare them against the annual cost of repairs.

Older tanks and pumping equipment can look fine on a balance sheet while sitting near the end of their working life. A buyer will price that in. Environmental history also draws questions, since these companies handle waste. Buyers may ask where hauled material is disposed, what receiving facilities are used, what manifests exist, and whether there have been any spills or notices of violation. Disposal contracts with treatment plants or land application sites are assets, and losing access to a disposal site can stop the business.

Permits, reporting and the regulator

Depending on the work, the company may hold hauler registrations, operator licenses, contractor licenses, and discharge or reporting obligations on behalf of its customers. Many of these are tied to the company or to a named individual, and some transfer with the business and some do not. The buyer's attorney will check each one. Expect the buyer to ask for a copy of every license and registration, the renewal dates, and the history of inspections and violation notices.

Reports submitted to regulators on behalf of customers are a particular area. If the company samples effluent and files monthly discharge monitoring reports for twenty facilities, an error can fall on the customer and then back on the company. Buyers will ask for sample files and the quality checks used. A clean record helps, and so does a procedure that someone other than the owner runs.

What tends to sink a sale

Sales in this industry are slowed or killed by the same problems. A large contract requires consent that the public body will not give in time. The chief operator leaves after the announcement. Equipment needs replacement soon after closing and the buyer had not budgeted for it. Environmental history turns up an issue with a disposal site. Customer concentration is higher than the buyer expected, with one district or one industrial customer providing a large share of revenue. Our post on customer concentration explains how buyers react.

Confidentiality is worth planning around. Public customers and operators talk to each other, and a rumor of a sale can reach the people you most need to keep. We approach buyers without naming the company, and buyers sign a nondisclosure agreement before they see anything identifying. The steps are in how we market a business confidentially.

How to get ready

Put the contract book in one place with every agreement and amendment, and note which ones need consent to assign. Raise prices on contracts that allow it. Cross-train operators so that no system depends on a single person. Collect the licenses, certifications and inspection history. Make a list of the equipment with realistic remaining life, and service what needs servicing. Reconcile the books to the tax returns, because buyers and their lenders compare them. Our post on getting your financials ready for a buyer describes what that looks like.

If you are considering selling a water and wastewater services company, Business Advisors of America can value the company from your numbers, prepare the materials a buyer and lender will expect, and bring in buyers who already understand regulated service work.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.