- Season: 5
- Episode: 6
In the latest MDM Podcast, Dan Tinker, president and CEO of McKinney, Texas-based building materials distributor SRS Distribution, dishes on a wide range of topics, including the company’s private equity backing, its unique and aggressive acquisition strategy that complements SRS’s greenfield approach, and what’s been driving growth since the company was formed in 2008.
MDM: This episode is brought to you by MDM’s Sales GPS Conference. MDM’s annual Sales GPS Conference is the only event that brings together sales leaders, experts and wholesale distribution executives. We examine how leading distributors are transitioning to data- and management-based sales models, go-to-market strategies, as well as industry innovations and disruptors. We focus on how to handle what’s happening now and what’s coming up next. To learn more, visit salesgps.mdm.com. Now, please enjoy this episode.
Welcome to the MDM podcast. My name is Eric Smith, senior editor for Modern Distribution Management. My guest today on the MDM podcast is Dan Tinker, president and CEO of SRS Distribution Inc.
SRS is a McKinney, Texas-based distributor of building materials and roofing products. The business is backed by two private equity firms, Leonard Green & Partners and Berkshire Partners. SRS formed in 2008, and has grown rapidly since then, both organically and through acquisition. The company just a few days ago announced its 100th acquisition since its founding. And a few days later, SRS even expanded into Hawaii with the addition of Aloha Roofing Supply.
By this time this recording reaches you, it’s very likely that SRS will have announced additional deals to grow its portfolio. One hallmark of the company’s M&A strategy is to keep all bolt-on acquisitions under the same banner and ownership as their customers have gotten to know them over the years. And I’m going to talk to Dan a little bit about this during our conversation.
SRS ranked No. 6 on MDM’s latest top building materials and construction distributors list, with $3.8 billion in revenue for 2020. And as Dan is going to share with us in just a few minutes, that number has already grown. And you can look for SRS to probably move up those rankings when the 2021 numbers come out next summer.
Well, hey, Dan, thanks so much for your time today. And welcome to the MDM podcast. It’s been a few years since you and I chatted, I think it was about five years ago. In that time, SRS has grown significantly, both organically and through acquisition. Could you give our audience just a little bit of an overview of the company right now in terms of size, number of locations — and I know that changes almost weekly now — number of employees, those kinds of metrics?
Tinker: Yeah, no, happy to. Thank you. And thank you for having us on — or having me on today. But yeah, we’ve grown rapidly through the last five years. Certainly, as you know, we’ve kind of grown through three ways. One, through same-store sales growth, one through opening up new greenfields. And then lastly, through strategic acquisitions in this space.
Probably the most noticeable thing is we really, we as you know, we founded the company as a preliminary roofing distributor and have gotten much broader in building products and now have a new vertical, Heritage Landscape Supply Group, which we started two and a half years ago. And just most recently, which you guys covered, we got into the pool distribution space, literally just a few months ago. So, we’re very excited about our two new verticals.
So, we continue to hit growth on all three sides. We are now sitting right around $5 to $5.5 billion in revenue, 475 locations or so now. And right around 6,000 employees, which has added about 1,000 employees already just this year alone, from last year through the first half of the year.
So obviously, we’ve been big benefactors of tailwinds from the COVID environment. We didn’t just look into it, a little bit on the pool side, but the outdoor living side has certainly been accentuated with COVID and, and then roofing and all things remodeling has been very, very, very strong. New construction and COVID outdoor living benefit, and also just people investing in their homes and remodeling and then obviously, obviously the millennial population demographic running through new construction has really helped us, too.
So I kind of tell people it’s really a tale of multiple tailwinds and no headwinds right now. We do, we do see that subsiding though, as we’ve kind of run through a nice 18-month run of people spending discretionary money towards their home and remodeling, and now starting to take vacations again and starting to spend that money elsewhere. But still, we’re in a really, really healthy space in building products in the United States.
MDM: Well, I don’t know if you can go a little bit deeper then, into what’s been driving growth for SRS Distribution during these last 18 months? And, and, you know, I guess, what’s driving growth today? And where do you see things heading, you know, for the end of 2021, and into ’22?
Tinker: You know, it’s probably the most frenetic pace we’ve ever seen on the M&A front and the green, and the greenfields as well. The greenfields was by design. You know, when COVID hit, we did what every good company did — we checked our balance sheet, we protected the asset and the company for the shareholders. But once we learned construction was deemed essential and we could lean back in really quickly, we got everybody in a room and said, ‘Hey, let’s not let a good crisis go to waste.’ And we really built a re-emergence plan back last year in April.
And I knew a bunch of our less-capitalized smaller distributor competitors were more public that had to do different things, were not gonna have the freedom we enjoy. We played to our strengths. We played our balance sheet, we played to our private equity partners having access to capital. We played aggressive on the inventory front ahead of supply chain challenges.
We hired kids out of distribution schools around the country when everybody else was pausing hiring. So we kind of ‘yinged’ when everybody else ‘yanged,’ so to speak, and that paid us huge dividends through COVID, so far.
And then, we also were the only company really in our space to continue to do acquisitions, even during COVID, and find safe and creative ways to onboard them, convert to our ERP, deploy people, and keep them safe during COVID before the vaccine. And then obviously, since the vaccine it’s been a little easier, although certainly we’re not out of the woods on the risk on that front.
But then, you know, continuing to this year, lots of greenfields, expanding into new markets expanding on the verticals I mentioned earlier. But then I guess the biggest, not surprise, but as you can probably imagine, in the current environment, we’ve had great years of earnings, we have multiples being paid for companies in our space. And then we have the administration change in the government, the federal government, that has made people expect a change in tax structure for capital gains, which has driven a lot of baby boomer-owned businesses to say, ‘This is the best time ever to sell a business and if I hold it now, miss this tax window of capital gains gets based on how big, I may have missed a window for five or 10 more years, and I’m 60 years old, or 70 years old, or 65. And I really don’t want to wait another cycle and hope I timed it right again.’
And then also, as you know, a lot of these owners don’t have children. Even if they have children in the business, they’re in their 30s or 40s, they don’t have the capital to buy them out at the multiples that the [unintelligible] do. And nor do they want to take the debt on the business or the risk on the business that they would have to pay out the previous generation. So, lots of factors have played out.
MDM: You know, and I wanted to — and I’m gonna skip ahead of here a little bit, Dan, since we’re talking about M&A, and you know, wanted to hear a little bit about, you know, your approach to M&A during the pandemic.
And, you know, you talked about some of the opportunities that sellers are looking at, especially from a tax perspective. Was M&A more difficult to pull off during the pandemic, when, you know, there was a great pause, you know, last spring really, with deals getting done? But then volume started to pick back up. You know, were those just some deals that were too good for you guys to pass up and you found a way to get them done even with, you know, maybe not being able to do some of the due diligence in person. You know, maybe take us through, you know, what SRS’s approach was to the M&A process over the last 12 to 18 months.
Tinker: Yeah, that’s a great question. So really, we didn’t change our process a ton other than the fact that we knew in-person meetings, early in the stage, were not going to be as accessible and have that much opportunity to do those. So, I think the beauty in our model is we’ve always pursued acquisitions over the long term, not as much opportunistic of who’s for sale this week and let’s go see him and hope we win or outbid.
One of things we pride ourselves on in our team is getting to know these owners of potential companies that are interesting to us that are strategic targets. And we get to know these families for, in many cases, years, but even some cases, decades. In fact, we recently bought a company called Gannon Wholesale in Des Moines, where — I’m not kidding you — I made the grandfather an offer in 1996. And made the son an offer at a previous company about 10 years after. And we finally got the business as part of the family in 2018, with the grandson of the company. So, you know, patience and persistence does pay off, and knowing the family and them knowing who you are.
And then, you don’t have to do those initial face-to-face meetings. You don’t have to meet with the family and talk to them about what their desires are, you really already know that going in. But then when they pick this timing, really sharing financial information, asking questions, and then getting comfortable on, as you know, our model, we want the owners to stay, we want them to reinvest, it’s a little unique to most companies because we’re not public.
We allow all the owners to kind of stay as co-investors. As you know, we have a really broad equity ownership program that includes really all the employees now, which is unprecedented, really, in our industry. And that’s, that’s resonating with owners, too. They don’t look at it as being sold or sold out. They look at it as joining forces with a new majority partner. And they’re seeking growth capital and risk tolerance to really unleash the family company’s full potential.
MDM: Yeah, no, that’s a great point. And you know, I love the story about, you know, making an offer to the grandfather and then the son, and then ultimately the grandson, and finally getting that deal done. You know, and one thing I did want to comment on too, Dan, is in writing about M&A a lot, I always found it fascinating that you guys do keep the, you know, the new asset’s, you know, banner and company ownership intact. it seems like, I mean, that’s, the companies that you guys are buying have that name recognition and that customer relationship. And that’s what you’re trying to bring on board, instead of just trying to make them part of SRS.
Tinker: Yeah, we actually think, you know, making a homogeneous environment actually is, forces you to the lowest common denominator of service and platform, not the best. So, if you really want to accentuate how, how to win in the market, what we realized a long time ago is contractors and builders, they don’t care if we have a business in Dallas and Seattle and Boston, because they only do business in Dallas, or Boston or Seattle.
So, what they care about is, can you compete in my market locally and adapt to the competitive forces and the service platform I expect in this local market? And because of that, actually, they feel like a number the bigger they feel the company they’re dealing with is, and not as important. Like, ‘You could afford to lose my business here in Seattle, and you wouldn’t even care, as you get bigger.’
So, all things being equal, our philosophy is a decentralized brand strategy where they still feel like they’re buying from the same — I love it when customers tell me, ‘Dan, I didn’t even realize that you bought the company that I buy from you, from 10 years ago. I didn’t even know it’s part of this conglomerate, or family of independents.
But what I like to say, we do the best of both. We’re all the good things about being big — meaning we buy right from the suppliers, we leverage our capital, and we run a professional back office in Dallas and take, the take the running the corporation off these families’ plate. And then, let them focus 100% on growth, taking risks, opening new stores, hiring more salespeople, adding more trucks, adding more DCs, adding new product lines, and not being afraid to take risks.
A family company by nature has two main goals: protect itself from all bigger threats and don’t pay taxes. You know, traditionally. Those are two big motivating factors. In a bigger private equity-backed business, it’s all about earnings growth. And so, when we put our playbook in, it’s like, when I first meet with an owner, I don’t talk to them about their past. I say, ‘What could you do with this thing if you had unlimited capital, unlimited risk tolerance, and I let you open another branch every three months and add as many trucks, as many salespeople, as many new product lines you wanted and I wasn’t scared about the risk, what would you go do?’
And depending on that answer is, it’s really more meaningful to us on what we pay for the business. If they say, ‘Well, I don’t know, I never thought about growth, and I don’t even know how to do it.’ They’re not going to get the same valuation as somebody else saying, ‘Where have you been my whole life! I know exactly what I’m gonna do with the capital. I’m going to double the size of the business in three years. And here’s the talent I have, the strategy and the markets I want to enter.’
That’s when we lean in and get really excited. But I’m proud of over our 100 acquisitions. And again, we haven’t owned them all for five years, as you know, but for every company we’ve owned for five years, on average — throwing no bad deal out — on average, they are 200% of original revenue and 300% of original EBITA. That means, not only do we know how to acquire and integrate, but we actually know how to grow and flourish everyone that comes into the network.
And that’s — I always joke, anybody can buy a company, write a check and outbid somebody else. It takes a lot of work to make a company you bought the morale to go well, the culture fit to be well, and that you all are aligned on growth strategy, and then you go execute. That’s the hard part in a minute.
MDM: Well, you mentioned, Dan — and thanks for sharing that — you know, you’d mentioned SRS’s private equity backing, been backed by Berkshire Partners for the last eight years, I believe. More recently, Leonard Green & Partners joined the ownership group. How have those partnerships benefited SRS? And, you know, really, have you seen the benefits of that, during the pandemic in particular? And, you know, what does the future look like here for SRS and its financial backing?
Tinker: That’s a great question. So, you know, I always, I always talk to people, especially some of our younger folks coming out of college, that private equity gets a bad name in the media. And it’s really one of the best vehicles, if you are a proven management team that has a business plan. And you know what you’re doing in industry, private equity is a very attractive model, even for, like companies that have scaled, it’s really attractive.
So, you know, the things I like about private equity as a weapon is, one, we’re not public. So, I don’t have to worry about managing the business in 90-day increments for quarterly earnings. Two, I’m not distracted by Wall Street requirements. Three, I’m not family-owned either. So, I don’t have to deal with some of the family pressures of different family members want to do different things, have different risk tolerances, you have to navigate around family members. We don’t have any of that. We have a professional board. We have a professional executive team.
And again, we do retain all the owners and they stay but they’re in meaningful roles or they’re asked to contribute, or they’re asked to move aside if they’re not going to work full time and contribute. But private equity has been a huge weapon during COVID. They gave us access to capital that we needed to lean in on going long in inventory, that we’ve now been an inflationary environment and benefited from that.
We made aggressive partnership decisions with our suppliers and our customers. And then we — everyone else was in a fetal position, so to speak, we were, we were already going full-bore offense on opening new stores, recruiting people from the competition. So, if a competitor of mine laid off their sales force, I picked them all up and said, ‘Hey, this might hurt for a little bit.’ But I’m going to pick up the customers long term because these are good employees that they shouldn’t have let go.
So, we kind of did a counterintuitive, you know, let’s lean in and use our strengths. And it’s, and I’m fortunate to work for a board and two private equity firms that said, ‘Hey, this is a once in a decade — if not multi-decade — opportunity for you to really win if you play on offense and be aggressive, and don’t, don’t worry about the near-term earnings, and you focus on the long-term earnings.’ And that’s what I really feel like a good private equity partner can do for you.
But you have to have credibility. You have to deliver your numbers as a management team. But luckily, we’re 14 years into this — almost 14 years in, we started in ’08. And you know, started years with [unintelligible], then five years with Berkshire. And then now, three years with Leonard Green, although Berkshire stayed in as a minority to Leonard Green. So, when you have a track record, you’ve delivered consistently, that gains you a lot of credibility from your board and your private equity firm to do what you feel is right to do to maximize their investment.
And the other thing is, you know, our company probably in distribution has the broadest ownership of a large company out there, with 25% of the ownership with options and real equity in the company that includes, you know, all 6,000 employees are part of the ownership structure. We either have direct cash, written equity, stock options, or what we would call the equity growth incentive plan, which was a gifted option pool for all of our hourly frontline employees, including every warehouseman, every driver, every inside salesperson.
So, I’m super proud that we’ve already made 150 millionaires in the company, employees. And my goal is to make hundreds more. And I don’t know of any other distributor that’s really done that in wholesale distribution in the U.S. in the last 100 years. I just can’t name one. Has there been some great stories out there of big public companies, whether it’s Grainger or Wesco, or Ferguson or wherever? Sure, but I don’t think the breadth and the equity structure and the employee base changes as many people’s lives as quickly as we have in the magnitude that we’ve done.
We have a warehouseman in Portland, Eric, that makes 18 bucks an hour, that’s going to retire with $1.5 million dollars of equity in the company that, again making 18 bucks an hour. That should say what the opportunity is. And he’s only been here, you know, at least I think about 12 or 13 years of the run. So pretty powerful and that leads to a different level of engagement, different level of commitment by the employee base, which is a big part of our secret sauce.
MDM: Well, and I’m glad you brought that up. Because, you know, one of the things I wanted to ask you about was, was one of the wins that you referenced a few minutes ago, Dan, which is that in June, the company announced that two-thirds of employees were going to share a distribution of over $250 million as part of that, that company’s equity program.
And I did want to just let you know, and let our listeners know, that was easily one of the most-read articles on MDM.com that month. TThat was picked up by a number of people, it went viral. A lot of people were sharing that story. To your point, Dan about, you know, a real success story in the wholesale distribution space. I don’t know if you can just share a little bit more about, you know, what’s behind that equity program. How long has this been a fixture at SRS?
Tinker: Yeah, good. Good question. I, the equity program existed since day one, with an ability from our chairman of the board and our original board and a philosophy to say, we want everybody to be in the boat that wants to be in the boat on the equity side. So, if anybody has the means and the desire to co-invest, and being an investor, not just an employee, they should have that right.
So, every employee in our company can invest in the company every 90 days. Think of it almost like we mark that we have a stock price, but it’s only published four times a year instead of every day of the year like a public company. But you only have the opportunity to buy in, not to sell, at those 90-day windows.
Now, if you retire and you’re at retirement age and you leave in good standing, you can ask the company to buy you out at a retirement age. And we’ve never not done that for a good lever in the company. But it really creates a neat environment where everyone feels like, ‘Hey, I’m a tow investor. I’m in. I’m a shareholder. But I’m parking money that I don’t expect to get back or don’t need next week or nine months from now. It’s more money that I think in five-year increments, along with private equity, that every time they have a liquidity event, I’m going to get a liquidity event.’
And so, they’re, they’re treated the same as the private equity sponsor in that anytime the private equity sponsor takes a dividend or a full-sale event, the employees all get fully liquid at the same rate, and can choose their own individual decision on whether they roll forward or not. So that’s the equity. That is just one piece.
The second is a traditional stock option plan like you’d expect in a public company, where we, the board, can gift additional shares to each key member based on title. So, if you, if you’re a branch manager, a key outside salesperson or you move up the company, you get granted additional stock options, or sweat equity, if you will.
And then lastly, if you don’t, if you don’t qualify for the options, you qualify for what we call our equity growth incentive plan, which is basically we wanted every frontline hourly employee in the boat. And so, the board allowed me to grant a $20 million grant to those frontline employees. And say, if you’re in that pool, and for every year you’re in that pool, you get additional grants. When we have liquidity events in the future, we’ll have, there’s no cap to what that $20 million can grow to. It will be dispersed among all of you frontline employees, based on how many units you’ve been granted based on your tenure with the company since we started the program.
And that’s, those three components added up to, we said $250 but it actually was almost $300. I think it was $297 million in June. That was paid out to all of our employees. Well, 4,300 of our employees because, again, you have to be here a year to qualify, so we have some transition and we’re constantly buying companies, opening new stores, so some have to qualify on January 1 at the end of this year.
But they’ll get, they’ll get new units and down the road if there’s another liquidity event — which there certainly will be at some point or multiple liquidity events — they’ll get paid out in due time.
So that’s exciting and really what’s even more impressive is if we took the capital, if we sold the company or took it public today probably fair market, the employees would own well over a billion dollars of value of the company, which is pretty staggering when you think about what we started the company, just, you know, 13 years ago.
MDM: So is, is an IPO in the in the cards?
Tinker: Well, we don’t talk about outcomes. We talk, we talk optimal exits and optionality, but is it likely at some point, the bigger you get in this space, that an IPO is more likely than less? Certainly, that’s true, the bigger you get. However, you know, we’ve seen big, big companies go back private, with big private equity firms teaming up to take, like Michael Dell’s company went private at $40 billion in revenue.
So, you know, there’s no, there’s no limit to — a lot of people think there is a limit how big you can get being private, and then you’d have to go public, that’s actually not true. There’s tons of alternative asset classes and sovereign wealth funds. And actually, the big private equity funds, a lot of them have long-term holding funds, where you can stay private for a decade, and they’ll just, they’ll just sell off tranches of it to other private equity firms, and place it to some of their limited partners as well.
So, we already have some limited partners co-invested alongside Leonard Green that have direct investment alongside of us, which are significant investors. So, you know, I joke never say never. I will, you know, we have a fiduciary responsibility to all the shareholders and all the employees to do whatever’s in the best interest.
If, if the public markets value our company at a premium multiple than private markets at some point in time in the future, is that a likely scenario? Yes, but it all comes down to arbitrage and where the multiples are better. So far, in our journey, every time we look to transact and monetize, the private markets have actually traded the company at a better multiple than the public would. And part of that’s because we have one company that it’s out there, that’s kind of a tough comp for us that it’s hard to break away from initially as an IPO.
But over time, look, there’s no, there’s no secret that you know, you know, we are positioning the business long term to be very attractive in multiple verticals, high-growth environment. All the investor community, public and private, like and respect and that’s not as, not as much demand hitched to new construction, way more resilient, from roofing from landscaping, from pool supplies.
All distribution markets have traditionally good industry structure where the distributors do very well and the ones that scale do even better, but demand is less cyclical than some other spaces.
MDM: Well, let’s, let’s go out with this question, Dan. And that is just, you know, what is the outlook for SRS? Are we going to continue to see some announcements roll in about new acquisitions as well as new greenfields? And are we going to continue to see those numbers go up into the right for the business? Is that, is that, kind of, in your outlook for the company in the coming months and years?
Tinker: Oh, absolutely. I mean, I tell me we’re in the growth business. That’s what we’re here to do and and not grow revenue, grow, grow the earnings side, but revenue too. But we want to build a world-class, most-admired wholesale distributor that also is huge in talent investment — huge on winning the war on talent.
But also huge on the innovation front and disrupting our verticals we’re in. So we are, we are playing to win on the technology side, playing to win on the talent side. But we have the capability now, at our scale, to probably buy 20 companies a year-plus now. Which we will do this year. And open 40 greenfields a year. Forty brand-new distribution centers, including some e-commerce fulfillment centers, and some cutting-edge things.
I think we’re one of the only distributors in building products that has an artificial intelligence group, a data science group, robotic process automation group, an e-commerce group, an app development team. And none of those groups are allowed to touch the ERP or running the company. They’re all on customer-facing or internal, making our employees more efficient as we go.
So, we’ve done some fun things behind the scenes here during COVID with its nice tail winds we’ve enjoyed in the market in the industry, to really invest in the company and be ahead of our scale. I mean, we’re trying to act like a $10 or $15 billion company now that we’re $5. And that is our goal. I mean, I won’t hide behind that.
We have a clear five-year plan to get to $10 to $12 billion in revenue. And we feel like we’re, we’ve never hit not hit a five-year plan within three years. So we’re — but we’ll see how it goes. But again, that’s why we’ve expanded into some new verticals.
But again, the M&A deal pipeline and our ability to outmaneuver our competitors in each of the verticals works because we’re the only ones with the equity story that we have or the culture that we have and the philosophies we have on retaining the owners, retaining autonomy, retaining family companies, brands.
It’s very unique of doing you know what I call again the best of the both. But yeah, we feel very comfortable we can double the company in the next four or five years and then from there, who knows? I mean, we want to own that last mile of distribution for everything big, bulky and heavy you can’t put — Amazon can’t put — in a box.
And I’d love to tell you in five years we do this interview again, I can get to any job site in the country within two hours from 1,000 locations, 10,000 trucks and I can get there in two hours with anything that weighs from 1,000 to 40,000 pounds and deliver it to a job site for anybody construction. And I don’t know if anyone else will be there, we hope to be there first. And then do that with an innovative, fully digital, fully, you know, integrated model that really is attractive to our customers, our suppliers and in many strategic partnerships with other people in the ecosystem.
MDM: Well Dan, I wish you and the company all the best as you pursue those goals and I promise you that it will not be another five years before you and I sit down and chat again because it seems like we’re gonna have a lot to talk about over the next year to three years about SRS Distribution’s growth. So, you know, thank you again and, and best of luck and appreciate you joining us on the podcast today.
Tinker: All right, thanks, Eric. And look, we appreciate MDM’s support. You’ve always been great in our industry. We’ve been big fans our entire careers and thanks for your interest in SRS and helping us share the story. Appreciate it.
MDM: Awesome. Thank you.
Read the latest articles and see your reports.