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Why Sell to Clayton?

February 14, 2017

Why Sell to Clayton?

Berkshire Hathaway's Clayton has purchased three site-built companies to date. (By Brian Croce - Builder News. Click HERE for full article) Since founding their Buford, Ga.–based company, Chafin Communities, in 1996, brothers Eric and Daryl Chafin never looked to sell the business. They saw no reason to; the company was doing well in the Atlanta market. Then in May 2015, the Chafins met with a few executives from Clayton, the Maryville, Tenn.–based modular builder to discuss Clayton’s potential acquisition of Chafin Communities. The Chafins took the meeting, but Eric Chafin was unsure about having his site-built company potentially bought out by a modular builder. Soon into the initial discussion, whatever reservations he held vanished. “They told us on the first meeting that they were owned by Berkshire Hathaway, and that kind of dissolved quickly,” he says. Clayton has been a subsidiary of Berkshire Hathaway, a well-known company run by billionaire investor Warren Buffet that also owns the likes of Duracell, Geico, Dairy Queen, and dozens of other companies, since 2003. In its 40 plants nationwide, Clayton built more than 34,000 homes in 2015. The company is in about every segment of housing that one can imagine, building traditional site-built homes, modular homes, manufactured housing, college dormitories, military barracks, and apartments. Clayton entered the site-built side of the business in late 2014 with the purchase of 81 lots in the Mundy Mill community in Gainesville, Ga., northeast of Atlanta. According to Mike Rutherford, president of Clayton Properties, Clayton had plateaued on the manufacturing side and could no longer expand with respect to market share. So it diversified. But Clayton soon discovered an issue many site-built companies deal with—land—and amended its approach. “We saw pretty quickly that it was hard to scale because there weren’t a ton of finished lots, which led us down the acquisition strategy,” recalls Rutherford. In October 2015, Clayton acquired Chafin Communities and a new venture was born. Since then, Gallatin, Tenn.–based Goodall Homes and Lee’s Summit, Mo.–based Summit Custom Homes have also come into the fold, in April and October 2016, respectively. Many builders consider selling their companies when they’re looking to retire or find a new line of work. But the Chafins had no interest in leaving the industry. “Me and my brother are younger and we weren’t looking for an exit,” Eric Chafin says. “We were looking for somewhere we could plant a flag and move forward.” That’s exactly what Keith Holdbrooks, president of the Clayton home building group, and his colleagues were looking for in their first site-built acquisition. “The goal was to find guys who want to sell but want keep working,” he says. “If you don’t have to deal with bureaucracy then you’ll have fun and keep working.” That’s the Berkshire Hathaway model, he adds, and it’s how Clayton itself is run to this day. “It’s in the same mindset as Mr. Buffet,” Holdbrooks explains. “He acquires companies and he doesn’t want to run them, he wants the management to run .” Kevin Clayton took over as Clayton CEO in 1999 and remains in that role today. Hearing that you’ll be able to run your company like you always have is great for a builder who’s thinking about selling, but how can you be sure that’ll be case when the deal is closed? A well-placed call might help. Why Sell? Bob Goodall, president at Goodall Homes, which builds in the Nashville market, received a call from the Clayton team in fall 2015. Rutherford had asked an attorney in Nashville if he knew of any companies that might mesh well with Clayton, and Goodall’s name came up. Goodall was initially surprised by the call and had never come close to selling before. “We had had some calls from other national companies ,” he says. “We’ve heard other people who’ve had bad experiences, so that wasn’t a route we wanted to go.” However, this call was intriguing. “To become part of the Berkshire Hathaway companies and to work with a lot of great people, and to keep our culture was something that was very important to us,” he says. Before he closed the deal, Goodall called the Chafins to see how things were going since their company became a part of Clayton Properties Group, Clayton’s site-building group. “They indicated that everything they’d been told was the way it was,” Goodall says of the Chafins. “That made me feel a lot better.” Two months after closing the Goodall deal, a broker reached out to the Clayton team and advised them to take a look at Summit Custom Homes, a major player in the Kansas City area. Summit had been on the market in 2014, but CEO Fred Delibero hadn’t found a perfect match. After meeting with the Clayton team, though, that changed. Delibero says the management teams clicked instantly. After touring Clayton’s headquarters and one of its plants in Tennessee, he knew joining its team was the right move. “It’s not easy to sell a great company that you spent 15 years building,” Delibero says, “but with Clayton, I saw an opportunity to continue to build our company free of the constraints traditional sources of capital impose while maintaining our culture and keeping in place the great team we built.” He was familiar with Clayton’s business and was excited about getting in on the ground floor of its site-built division. “It just felt right from the very first meeting,” he says. Delibero elected not to reach out to the Chafins or Goodall prior to selling because he was confident in the Clayton team’s word. “Before the sale closed, the team at Clayton told me to run the business the way you always have, and build upon our success with their resources,” he says. “Now that the sale is closed, that’s exactly what is happening.” When making his decision, Goodall considered the young people in leadership positions at his company. “I envision these team members being superstars, and I think this gives them a better opportunity for growth, provides a lot more capital than we had before, and it’s a great support system,” he says. With the capital infusion from a Berkshire Hathaway–backed company, each of the site-built builders says their options have never been greater. “Before, a lot of what drove our decision making was just cash flow, debt, and personal guarantees, and now we can think a lot more long-term and don’t have to worry about the cash flow nearly as much,” Goodall says. “It changes everything. It’s a paradigm shift for us.” These site-built builders also are eyeing new markets and plan to grow their closings in the near-term. For Summit, which closed 243 homes in 2015, Delibero expects growth in the Kansas City metro area and some regional expansion. “We think we can double our sales in the next three years while opening one or two new regional markets,” he says. Company Collaboration "The greatest idea we've ever had has not been thought of yet,” is a quote that’s pasted across a wall at Clayton’s headquarters, and it’s a concept the company’s executives take to heart. With three site-built companies now under the Clayton Properties Group umbrella, ideas to make home building more efficient are encouraged. For Clayton, one of the major initiatives in the coming years will be to leverage its buying power from manufacturing around 40,000 homes a year and translating those cost savings to its site-built entities. “We buy stuff by the truckload and by the railcar.” Rutherford says, adding that the goal is to figure out “how we translate that into a home package and really have them benefit from being part of the buying power that Clayton has.” It was something Goodall was eager to delve into after selling his company. “Being able to take advantage of that buying power is enormous,” he says. “That’s probably the biggest thing that started early and often.” Clayton Supply, the company’s building materials arm, will supply 40% of the home building group’s raw materials in 2017. Since Clayton itself is a modular builder, Clayton Properties Group is looking to combine those best practices with its site-built companies whenever feasible. “When we go to our site-built properties—and we’ve grown up on the manufacturing side all our lives—we see some things from an efficiency, waste ,” Holdbrooks says. “And then when they come to our facilities they see opportunities that we can improve on.” Eric Chafin says he’s exploring modular practices, and, without going into detail, that Chafin Communities will look to implement “some minor stuff” to the site-built business this year. “We’re always looking for to improve efficiencies and time frames,” he says. “That side of the business really has got it down to a science, and in site-built, we’re not like that.” Delibero says it’s hard to tell if Summit will one day adopt modular practices. “One thing is certain, though,” he says. “We will work toward reinventing the way site-built homes are built.” Holdbrooks says the opportunity to automate processes is huge on both the factory- and site-built side. “It’s from the speed, quality, and efficiency side of it that’s intriguing,” he says. The Clayton team says it’s always looking for more site-builders to acquire, but will only execute a deal when a perfect match is found. While its Clayton Properties Group roster continues to expand, marrying building methods will take center stage. “There’s no doubt we all have to change our processes and get more efficient at what we’re doing,” Holdbrooks says. “The door’s wide open for collaboration between site and factory.”  
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