After a year of unprecedented M&A volume, many manufacturing business owners are taking a fresh look at the options of selling or expanding.
During 2021 global mergers and acquisitions (M&A) reached a record high, topping $5 trillion, while in the U.S. deal volumes nearly doubled to $2.61 trillion. With this red-hot M&A market, the new year presents the perfect time to make a decision about your company’s future.
The manufacturing industry has become more complex and is facing significant changes—both known and unknown—that will create challenges and opportunities for business owners. For example, supply chain disruption, inflation pressures and labor shortages. This is the time to ask yourself if you have the mental and physical strength to weather another four quarters of the stress of ownership. If not, is the next generation of your family ready and willing to step in and lead the business to a higher plateau?
If you decide to expand, you can choose to continue to grow organically or through acquisitions, finding partners and/or additional funding. Conversely, if you do not want to make the investments necessary to be competitive, or you want to take advantage of the high valuations in the current market it may be a good time to exit.
As a rule of thumb, the process should begin with a realistic evaluation of your situation, a discussion with your management team and a brainstorming session with an investment banker who is experienced in guiding your type of business through strategic alternatives.
Following is a summary of some of the pros and cons of the various options to get you started on determining the best future for your company.
Options for Investing and Expanding
Once you have made the decision to invest in your company, consider: can you grow your business organically or do you need to add external assets to keep moving forward? The basic strategies include the following options:
- Find a Partner – Seek a strategic partnership to propel growth with expanded resources and or capabilities.
- Secure Growth Capital – There are several sources of growth capital available. Three of the most popular methods are:
- bank debt via a commercial loan; currently the market is offering favorable rates and terms
- mezzanine financing through an unsecured loan that typically commands higher interest rates than a bank loan but has no principal amortization, providing better liquidity
- equity investment, in which an individual or firm exchanges cash for ownership in your company with the anticipation of sharing in the income and growth
- Acquisition – If you want to consider an acquisition, you should only choose to acquire another company that will be accretive to the value of your business. Begin by developing a checklist of criteria that the acquisition should provide. Some key areas for consideration are adding product lines, distribution channels, capacity, capabilities and geography. Carefully consider the impact of additional customers.
- Organic Growth – Create new ways to increase revenue by using your existing resources more effectively.
Options for Exiting from Your Business
There are several options that exist to take money off the table. You can do a recapitalization or “recap” that will reorganize the balance sheet and allow the owner to take money out of the business while maintaining control. You can also sell all or part of the business. There are several types of buyers who have different advantages and attributes that can be considered:
- Strategic Buyer – A strategic buyer often pays the highest price and has significant synergistic reasons for wanting to acquire your business. Your company’s capabilities could increase the strategic buyer’s scope by substantially increasing their own value and paying you a lucrative multiple. In today’s market, foreign strategic buyers are paying above-market prices for companies as a way to get into the U.S. market, which is one of the reasons for the M&A boom.
- Private Equity – A private equity firm may purchase a portion of your company (majority or minority), allowing you to take money off the table, stay involved and share in the growth. This is an appropriate hedging strategy for those who are not quite ready to exit and want to hedge their bets.
Determine the Real Value of your Business
In any of the above scenarios, your investment banker should be able to help you understand the real value of your business. Be very careful about the industry rule of thumb since the specifics of your business highly impact its value. Do not assume that an industry average multiple is the right valuation metric for your business.
You must be able to see your business through the lens of potential investors and understand the value that they see in your company. If the purchaser is strategic, then you need to know how your business will impact the value of their business to obtain the highest valuation.
All in all, acquisitions and divestitures represent great opportunities in 2022. With sound advice, good planning and a strategic approach, you can review several options to determine which is best for your business.
Selling your own company—or buying someone else’s—is not a task you want to take on without the assistance of experts who understand the steps and can navigate the process while bringing value to whichever side of the table you end up on. This team should include investment bankers, attorneys and accountants who can help guide you through the process—and bring optimal value to the most important decisions regarding your company’s future.
Alan Scharfstein is president and founder of The DAK Group (www.dakgroup.com), an investment bank based in Rochelle Park, NJ. Mr. Scharfstein founded the firm in 1984 to cater exclusively to the M&A needs of middle market business owners and has negotiated more than 750 transactions in a wide range of industries. Contact him at email@example.com.
Michael Richmond is a Managing Director of The DAK Group, where he advises business owners on sell-side and buy-side transactions. He works closely with clients to obtain the maximum value for their companies. He has recently been appointed President of the Exit Planning Exchange, NJ Chapter , an association of professional advisors who work collaboratively on exit planning for their business owner clients. Contact him at firstname.lastname@example.org