Last time we looked at the business of buying and selling businesses.

This time: we’re heading to the scrapyard and the surprisingly competitive market of recycling in the state of Georgia. 

Fast Facts:

• US Scrap Metal Recycling Market Size: $9.2 billion with a projected 5.4% CAGR 

• Number of scrap yards in the US: 13,779

• Zoning & Licensing: Depending on the state and types of materials you handle, you’ll need a variety of different licenses and more importantly, the zoning 

• Most localities aren’t excited to zone more scrap yards

• Margins: Most scrap yards operate on 10-15% net margin

Chart:

• Naturally, the pandemic had an impact on the volume of recycled materials processed in the USA in 2020

• But you can see from this chart from ISRI that rates have bounced back pretty quickly

• The real issue is price volatility

• As this Statista chart shows, prices are all over the map and 2023 was not a great year

Overview: 

• Sam Bacon’s scrapyard business is: 

  • A mid-level aggregator 

  • That means they buy the materials at a retail value and get a premium for aggregating and upgrading the materials they gather 

  • They are a “reverse Amazon,” as Sam puts it

  • Operations are starting to move into processing following acquisitions of nearby scrap yards and processors by a bigger company from out of state

  • Price volatility in the scrap metal market is a constant issue

The Story:

Sam’s entrepreneurial career started with his commercial demolition business Green Circle which now operates across four related areas. 

Green Circle does commercial and industrial demolition, recycles the metal from the buildings, and performs environmental remediation for issues like mold, asbestos, etc. 

He is now getting into the business of processing recycled metal. 

The commercial demo and remediation businesses are good ones but they come with lumpy revenue, lots of accounts receivable, and a whole bunch of insurance risk. These aren’t businesses that produce a lot of value at sale. 

So Sam naturally looked to adjacent businesses where he could build that value. 

Once you demo stuff, you need a place to recycle it so he discovered the world of the scrapyard, opening his first one in 2015 in Atlanta.

Scrap metal recycling has some great features. 

The revenue is pretty steady, the number of scrap yards is pretty stable, and the operations are pretty routine. The biggest issue has been commodity price fluctuations. 

Some years you make a killing and in others, you just scrape by. 

A scrap yard dealer is always trying to balance how many tons they take in at retail against how many they think they can sell and at what price within the next 30-60 days.

At that time Sam launched his first yard, he had about six local competitors. Since then, the majority of them have been bought out by Sam and a large national company from California. 

Now the issue is that the company has been consolidating the processing market. That’s where scrap yards like Sam’s sell their recycled product. 

They now own 85% or so of the Georgia scrap market, including the three biggest recyclers. 

Once upon a time: he’d earn about $60 selling his scrapped ferrous materials (Ferrous: anything that contains Iron) to these recycling plants. 

But now this larger conglomerate has come along, he’s lucky to make $20.  

He told me in his episode of the podcast (you can find the links below) that he’s now stuck in a one-price market thanks to the consolidation of all neighboring businesses.

To find more margin, Sam is moving down the next step of the value chain. 

He’s brought in processing equipment and has started becoming his customer.

I wouldn’t want to compete with Sam as he gains momentum here.

Scrap yards are a business that, on the face of it, seemed amazing to me. 

They are hard to create, easy to run, and have a pretty steady supply of materials. 

They felt almost like a real estate play to me but digging in there are some issues:

• Entry Bar: (5/5) If you want to open a scrap yard, you need to comply with a thicket of zoning laws and regulations and there are a few localities that are going to be excited about your plans. 

• Steady Cash Flow & Profits: (2.5/5) Supply and a certain level of revenue seem steady once you are up and running but price fluctuations on the international markets make this a boom or just getting by kind of business. You have to be able to ride the storm.

• Scaling Potential/Owner Dependency: (2.5/5) The attractive part of scrap yards is that it doesn’t take a rocket scientist to run them, so you don’t have a ton of owner dependency but they are very hard to scale. 

• Differentiation: (1) There are only so many ways you can stand out in the market as a scrap yard. It’s not something people tend to shop around for when they have a big pile of scrap they want taken away.

• Pain in Ass Level: (5/5) You need some knowledge of how to cost products coming in and how to balance supply and demand but again, these places can be set up to run themselves.

• Wrap-up: I still like scrap yards but I do think it makes sense to integrate across the value chain the way Sam has. It’s the only way to stay ahead of a consolidating industry, and commodity price fluctuations can be balanced by the ups and downs of other Green Circle business lines like demolition and environmental remediation.

📅 Next Week:

Next week we are going to deep dive into the champion of franchises Brian Beers. We are going to learn more about his experience in the franchise world and why he thinks it's one of the best business models in the world. 

Keep growing,

Alan

P.S. 

The most recent episode of The Small Business Mentor Podcast is live. My guest this week was Jay Broyer. We went into a lot of detail on the challenges you face growing an SMB and how he managed to crack the growth code. 

Check it out here: 

• Apple: https://bit.ly/3HiB6qq

• Spotify: https://spoti.fi/3O2fK4g

P.P.S. 

Do you have a small business growth story and want to be featured? Ping me on X @apentz, or submit at http://www.fame.so/sbp-story