Taking a look at how US manufacturers can take advantage of a strong M&A environment.
The prognosis for manufacturing M&A in the USA for 2015 is at an all-time high! A handful of commentaries in recent months:
WSJ: M&A Deal Activity on Pace for a Record Year (8/10/15)
Forbes: 2015 Could be the Best Year for M&A since the Financial Crisis (6/17/15)
JP Morgan: The M&A Market is poised for Continued Growth in 2015 (7/15)
Axial Forum: Manufacturing M&A: Strong and Rising in 2015 (3/17/15)
Deloitte: Pace of mergers and acquisitions to extend – or even accelerate- in 2015 (6/15)
KPMG: Acquisition Momentum is Building (3/15)
PWC: Second Quarter 2015 Industrial Manufacturing Industry…on a Steady Climb (8/15)
So, if all of that is true, how can US manufacturers today take optimum advantage of this environment?
Manufacturing competition is fierce in the US today, with growth difficult to sustain entirely from within. One of the great ways to boost growth, is to consider the power of business combinations. If you’re the buyer – it’s a way to accelerate to gain the lead. If you’re a seller – it’s a way to make your company stronger for the future. Additionally, thousands of business owner entrepreneurs are rapidly approaching retirement in 2015. Sale of a privately owned company will always feel to owners like an “iffy” project. But the opportunity for potential sale may NEVER be greater than today!
Owners can benefit enormously, buy taking advantage of the velocity in today’s super-charged M&A market. Begin by understanding where the power and value as a possible acquisition candidate begins. Start with an appreciation of what is valuable in a company today. Buyers add to purchase price for:
Strong profits relative to sales volume (ebitda as a % of sales)
Sales trends showing steady positive growth
Power-house second tier management
Well-maintained and up-to-date equipment
Segment focus in areas with healthy, growing customers
Proprietary or patented technologies
On the other hand, buyers fear, and subtract from purchase price for:
Heavy dependency on the owner
Customer concentration with one or a very few
Constraints in growth without major capital additions
Intense pressure on margins, with sliding % levels
Competitive disadvantage relating to new technology
The seller of 2015 who does well relative to many of the “pluses” highlighted above, may move this year at a value higher than ever before. Even the disadvantages, if correctable, can have appeal to the buyer who has the strength to correct them. (We sold a manufacturer two years ago with ZERO sales staff. The owner was embarrassed to acknowledge his “marketing department” of zero. But buyers actually liked it, thinking, “If it does this well now, just THINK of what it could do if we fix that!”)
In working forward to consider sale, here are a handful of “tips” about the process:
1. Hire competent help from someone in the business of selling companies.
Identification of buyers takes time and effort. The data required about the
seller company is extensive. This is often one of the most important
financial transactions of a lifetime. It is not a task to do “on your own.”
2. Guard confidentiality. Obtain signed non-disclosure agreements before
sharing any information. (We use a client number on the NDA, before even
identifying the company.) Don’t tell employees until the deal is done.
Employees and even customers often fear sale, and when you can reassure
everyone about continuity as you make the announcement of a “done”
deal, things go much more smoothly.
3. Consider a range of suitors. Owners often think they know who the best
buyers will be, but they are almost always wrong. The obvious is usually
not the best. Someone “adjacent” to your business may get much greater
advantage from the purchase. They pay more, and they disrupt your
4. Be meticulous, thorough and 100% honest with all information you
provide. Home run transactions are built on a foundation of full and fair
disclosure. It pays, both before and after the sale.
5. Don’t be quick to accept a “letter of intent’ from a buyer, which requires
exclusivity, and stops all further talks with other prospects. Work through
all key details before any such acceptance. When competition ceases,
seller leverage diminishes enormously.
6. Anticipate some reasonable time to transition post sale. Buyers may hope
you’ll stay long term. But they will REQUIRE that you transition for a
minimum of 6-12 months post close.
For those who are reasonably “ready” now, 2015 may offer extraordinary opportunity. For those who aren’t, it’s worth the effort and cost to improve. Ownership of a company can and should be more than a job for the owner/CEO. A valuable company creates financial security for its owner, and safety and solidity for employees. Today’s environment nurtures that potential!
About the Author
Deborah Douglas is Managing Director of Douglas Group, a merger and acquisition firm focused on the sale of middle market companies. Douglas Group has been working with private company sellers in the US for 24 years, and is one of the longstanding leaders in this business segment. For further information contact firstname.lastname@example.org, or call 314.991.5150.