By Michael Warady
Our country is currently in the midst of the greatest transfer of wealth in the history of mankind – not in 10 or 20 years – but today. Much has been written about the Silver Tsunami, roughly defined as the wave of water and wastewater operator retirements across the country. And yet, while every industry conference (virtual or not) reminds us about the latest operator to hang up his or her hat, relatively little attention has been paid to the challenges we face as similar retirement trends plague private businesses servicing the industry across the country.
These businesses – from membrane suppliers, to pipeline leak detection, to SCADA programmers – provide invaluable service to the water industry, yet many do not currently have a transition plan or a ‘second generation’ of ownership in place once they retire. Who is going to supply the membranes, the replacement parts, the pumps, the treatment skids when these owners close their doors?
According to the California Association of Business Brokers, retiring Baby Boomer business owners are expected to sell or bequeath $10 trillion worth of assets over the next two decades, currently held across 12 million private businesses. The numbers in our industry correspond with this broad national trend. According to a 2010 report by the American Water Works Association (AWWA), between 30 to 50 percent of water and wastewater utility workers will retire or quit within the next 10 years. Notably, the average age of an operator is 47 years old, and the average age of a small business owner in the United States is slightly older, at 50.
When people ask me my thoughts as to the greatest threat to American water and wastewater infrastructure, then, I don’t default to a lack of public financing, or decaying infrastructure, or the relatively slow rate of technology adoption, or even the repercussions of new and emerging contaminants. Instead, in my mind the greatest challenge currently facing water and wastewater utilities, industrial treatment firms, and wastewater service companies is the accelerating trend of retiring Baby Boomers. Many of these individuals, with 20-plus years of operational experience, long-standing customer relationships and mature vendor supply chains, are retiring prior to being able to pass their knowledge along to the next generation. These small, regional businesses may be known only to the most astute water industry observer, with solutions that are not headline-grabbing. Their technical expertise lies outside the realms of the latest R&D poster or paper, and yet their experience solving customer problems through operational insights have been the means by which utilities, industrials and commercial/residential owners have successfully operated their treatment systems for decades.
The solution to this issue is an industry-wide push to provide owners with an understanding on how to properly transition their business to the right industry partner, not the first capital provider, in order to help them accomplish this goal. With an industry-wide, continuing education focus not only on technical membrane and chemical treatment processes – but also on raising capital, establishing seller financing mechanisms, and shifting management – the industry can actively begin to manage this generational shift on its own terms. There are plenty of aspiring entrepreneurs within the water sector that are excited about the potential to manage and lead teams yet may not currently have the understanding of how they can compete for these acquisition opportunities with traditional acquirers such as private equity, venture capital, or strategics.
While the macro trends above clearly describe a problematic situation, discussing industry-wide retirement trends with owners doesn’t help them with how they should plan their transition. Specifically, while in the process of selling, owners have a few priorities to consider:
- Ensuring that they receive a fair market price;
- Knowing that whoever operates the business in their place is going to treat existing customers well;
- Protecting existing staff that, for many, are second only to family; and
- Maintaining the legacy of what they have built over the past several decades.
The question then, if these previous prognostications are correct, becomes how the industry should shape the response to this needed ownership transfer. When a next generation of family is not available, selling to a strategic, who will likely dramatically change the culture of the legacy firm, or a Wall Street private equity fund, with little to no operating water experience, should not be the only remaining options other than just closing the doors and walking away; instead, the default should be to find a Main Street water entrepreneur, someone with experience in the broader water industry, who will care for the business as one’s own, will have it become their going concern, and will seek to operate the company for the next several decades.
There are several options to accomplish this feat, all of which the water industry and industry associations should actively promote and educate under the umbrella of “Entrepreneurship through Acquisition,” or ETA. ETA is a business model in which entrepreneurs choose to forgo the traditional model of starting a business from nothing and instead focus on acquiring and operating an already established successful business, according to resources from Carnegie Mellon University. This ETA model manifests itself from the water industry business owner’s point-of-view in three ways. The first option, referred to as seller financing, is where an owner sells the company to trusted employees for some portion of the business’s value upfront, with the employees paying the remainder out of business profits over a set number of years. Industry associations can help owners and employees work together to determine relatively standardized timeframes, interest rates, and other terms to ensure that all parties involved are comfortable with this structure.
Another option is for owners to grant/sell employee stock ownership plans (ESOPs), where owners allow employees to buy shares, over a period of time, in order to create gradual liquidity for an owner, while respecting employee cash restraints. In this situation, owners can realistically stay on board as majority owner for a number of years even after starting an ESOP, training employees to take over, and only sell control or ownership when all parties are ready. Plenty of information is available on ESOPs online from advocacy groups such as esopassociation.org.
A third option is to find long-term and like-minded water and wastewater operators from outside the owner’s business, of which Sylmar Group (sylmargrp.com) is one, that have committed capital and the ability to acquire businesses in the sector and run them forever, building off of the legacy of founders. Focusing on these initial three levers, rather than traditional options such as private equity or strategic acquisition, will lead to a strong retention of ‘water people’ in ownership positions, while also helping increase the number of young people that want to stay in the industry as they see an opportunity to own companies without the need to start a new company from scratch. In many respects, this industry needs management and operational expertise right now far more than it needs new widgets.
For too long, the water industry has ignored the impending retirement wave of many of its best and brightest. The future of the individuals and companies that serve as the linchpins of the municipal and industrial water sector has for too long been ignored, assuming that traditional solutions and investors will inevitably fill these gaps. Yet these gaps remain wide open and we need a concerted, industry-wide effort to solve this problem in the near future. The private sector, and the water industry broadly, must begin thinking of ways to transition their businesses to their employees and to professionals with a history and experience operating within the industry. Doing so will not only ensure that clients and staff are treated fairly but will also lead to a more seamless transition to the next generation of water owners.
The water industry is unique in many ways – we’ve been around for 100-plus years and we’ll be around for the next 100-plus. But we must do much more in order to manage the backfilling of these impending wave of retirements, while ensuring that our industry continues to operate seamlessly – delivering clean water where needed, treating industrial water to maintain uninterrupted operations, and flushing away dirty waste quickly and efficiently.
Without an industry push to ensure that this happens, we risk not just a capital investment deficit, but also an existential risk that we lose the people, and knowledge, that we need to lead us into the next generation of water infrastructure.
Michael Warady is the president and co-founder of Sylmar Group. Prior to co-founding Sylmar, Warady led infrastructure project development and growth-stage equity investment at Aquatecture, where he developed centralized and decentralized water infrastructure projects such as desalination and wastewater reuse. He earned his Bachelor’s from Duke University and his MBA/MEM from Yale University. He is a frequent contributor to WF&M.
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