M&A as a Growth Accelerator

By Tom Zucker,
President

We have all been inundated with news of disruption and suffering caused by the recent COVID pandemic and ensuing recession. The current economic situation is best described as “uneven” with certain sectors having been minimally impacted while others have seen businesses shut down with no near-term signs of economic life. If we had the ability to fast-forward time to June 2025, I am certain in hindsight that we would see significant economic opportunity in 2020. Unfortunately, in times of turmoil, business owner’s decision-making processes are clouded by current emotions and fear which limits their ability to see the opportunities immediately in front of them. In a 1986 letter to shareholders, Warren Buffettdescribed fear andgreedas diseases that infect investors, “We simply attempt to be fearful when others aregreedyand to begreedyonly when others are fearful”. We believe that now is a time to be “greedy” (opportunistic).

Today, there are many opportunities presenting themselves to improve a business including leveraging technology to connect with new customers, identifying new partners and fortifying supply chains, and top-grading or realigning talent within your organization. During prior recessionary times, business owners often cite the opportunistic (“greedy”) and timely acquisition of a competitor as a major pivot point in the growth trajectory of their company. The ability to make in-roads into acquiring new customers, expanding into a new market, enhance capabilities, geographic expansion, or securing talented new team members are all encouraging reasons for an acquisition.

Despite the fear and uncertainty that this pandemic has produced, the majority of privately held business in America today could benefit from these circumstances by strongly considering an acquisition. Many opportunistic buyers may believe they don’t possess the adequate capital on-hand to make an acquisition, but there are many pieces to this puzzle that may help. There remains an abundance of capital available to finance a well-planned growth strategy and in many instances sellers are willing to help finance the capital gap. Traditional lenders are eager to fund strong management teams with a preference towards well-capitalized companies. For those companies (Buyers) with less capital, subordinated lenders, SBIC funds, and junior equity funds are very active in this market structuring transactions that will enable undercapitalized businesses to bridge this gap and help complete an opportunistic transaction. The punchline is that now is an ideal time to consider being “greedy” for an acquisition, and there are many financing resources available to assist a willing buyer in pursuing this strategy.

Consistent with previous recessions, future uncertainty is causing downward pressure on value and purchase price multiples. Despite these headwinds, well-run companies that were prepared to navigate the pandemic, are in great demand as sellers. We are representing a number of these companies and have exceeded owner’s expectations by obtaining higher valuations than anticipated on the last four deals we marketed. Significant M&A demand remains in the market fueled by undeployed private equity capital estimated to be several trillion dollars and the insatiable desire for growth by public companies. We expect that profitable and growing companies will garner strong interest and elevated market pricing for the foreseeable future.

Whether they are buying or selling a business, good entrepreneurs are experienced risk managers. M&A transactions require great skill and expertise to properly identify deal risks and to structure a deal to increase the likelihood of a deal being successful. Professional business buyers are approaching historic adjusted EBITDA with caution. The measure of operating profitability known as EBITDA has been expanded to included adjustments related to the Coronavirus affectionately referred to as EBITDA”C”. To balance the risk and uncertainty created by the pandemic, seasoned buyers are using earn out (contingent) structures and tiered pricing for achieving EBITDA levels in the next 12 to 24 months to calculate purchase price. Buyers are willing to pay full price for a business if the seller is willing to perform in a manner consistent with past performance that reflects a diminished impact from the pandemic.

The growth mind-set is the most important tool for an entrepreneur. The ability to approach calls with prospects, bankers, accountants and others with a credible growth plan and an optimistic perspective is essential. Rather than bemoaning politics or a negative pandemic impact, a pivot towards identifying growth opportunities by acquiring a struggling business or partnership opportunities to provide access to new markets and generating growth is a much better business exercise. The government-imposed shutdowns can have additional benefits besides creating more quality time with your family. We have found leaders of corporations in the new work at home environment are more available and willing to connect with new people and hear fresh ideas. The ability to have a meaningful conversation with these owners about their business, unwanted business units, or the possibility of adding you as a new supplier can be rewarding.

Embracing a growth-oriented mindset and exploring M&A acquisition opportunities are good steps in successfully navigating the uncertainty and disruption of the pandemic and accompanying recession. The fundamentals supporting M&A transactions remains positive and attractive despite the shutdowns and negative media coverage. Owners heeding this advice will be in a better position to successfully emerge on the other side of moving forward. Trust the sage advice of Warren Buffet by being “greedy when others are fearful.”

© Copyrighted by Tom Zucker, President of EdgePoint Capital Advisors, merger & acquisition advisors. Tom can be reached at 216-342-5858 or on the web at www.edgepoint.com.

Industrial Manufacturing- Changes in Technology to Drive M&A Activity

By EdgePoint

There is no denying the transformative effects of technological advancements on businesses. Many changes in the industrial manufacturing industry have come from consumer preferences and demand. Consumers want things faster and of better quality, personalized and unique, and newer than last year (or even last quarter!). Due to the rapidly evolving pulls from end consumers, manufacturers have had to find a way to keep up not only with demand for products, but also with finding skilled workers to make products in an ever more technology driven age. As we will discuss below, there are several trends pulling manufacturers into a technology driven operating environment, resulting in companies turning to M&A in order to stay competitive.

There have been a number of trends and developments that have emerged over the past decade that affect the industrial manufacturing industry. These trends include the Internet of Things (“IoT”), the rise of artificial intelligence (“AI”) programs, and the implementation of computerized maintenance management systems (“CMMS”). These advancements have improved the manufacturing systems and efficiencies globally but have done so with significant investment on the part of industrial manufacturers.

By the end of 2019, there will be more than 1.5mn robots on production lines globally. There is some concern that the rise of technologies and utilization of robots will render a greater percentage of manufacturing jobs redundant. At EdgePoint, we believe the ongoing development and implementation of these technologies will open many doors for businesses, with human and robot collaboration being at the forefront of growth.

As this trend is set to continue and likely accelerate for the foreseeable future, it is worth looking at the ways that these technologies are fundamentally changing the manufacturing industry as we know it.

IoT, Big data, and Increasing Visibility

Manufacturers have always wanted to ensure consistent, reliable quality of every product or component produced. A once seemingly impossible task has now become a bedrock part of the production process for a growing number of companies. With the increased implementation of AI and CMMS technology, devices are connected remotely, allowing them to “talk” to each other. Commonly referred to as the Internet of Things, this technology connects factories to the internet, enabling automation and remote monitoring.

With this continuous connection and sharing of information, machines can seamlessly talk to each other and react to any problems that arise. This information can be measured and analyzed to increase productivity and efficiency, while reducing downtime and error rates. Additionally, machines can detect miniscule defects missed by the human eye during time consuming manual checks. The enhancement in precision manufacturing capabilities buy these smart technologies ultimately reduces costs for manufacturers by greatly reducing product failures, labor rates and production line downtime.

Predictive Maintenance

One of the biggest trends emerging in industrial manufacturing due to increased adoption of technologies is the impact on predictive maintenance. According to an article published in the Wall Street Journal, unplanned downtime due to machine breakdown or malfunction costs manufacturing businesses in the US approximately $50 billion annually.

AI and CMMS technologies have the power to make these expensive interruptions a thing of the past. As previously discussed, AI and CMMS systems constantly monitor and evaluate how a machine is running and can detect and analyze the slightest shifts in performance. More importantly, these systems have demonstrated the ability to forecast when an issue is likely to surface on individual pieces of equipment prior to the issue taking place. By identifying and flagging issues at earlier stages, businesses can foresee and proactively plan for maintenance, ensuring minimal disruptions to production capacity or quality.

Impact on the Workforce

While the power of technology has led to some exciting advancements in the capabilities of manufacturers, they continue to have an impact on the manufacturing workforce. A common issue facing industrial manufacturing businesses is a moderate or serious shortage of skilled or highly skilled personnel. In the next decade, it is expected that as many as 2 million manufacturing jobs will be unfilled due to this skills gap. The skills required of a manufacturing employee have transitioned from an assembler on a production line to that of an engineer with the ability to design and manufacture shapes utilizing software and equipment. It is fair to say the manufacturing labor is no longer a blue-collar workforce but is transitioning to a highly skilled white-collar labor pool.

Today’s manufacturing employee is not only highly skilled but highly compensated, earning approximately 25% more than the average U.S. hourly worker. Technology, and employees demonstrated ability to utilize new equipment and processes, is making these jobs more lucrative than before.

Given the costs and complexity of implementing new technologies, combined with difficulties in recruiting the new-age manufacturing employee required to operate these systems, many companies have made the strategic decision to utilize M&A as the primary tool of expanding their capabilities. The trend of industrial manufacturing firms utilizing M&A as an efficient method of acquiring new technologies and the hard to find human capital required to evolve and compete in the IoT economy is likely to accelerate over the coming decade as technology continues to evolve. The only constant is change, and this change will continue to be the fuel of M&A activity in the Industrial Manufacturing industry.

© Copyrighted by EdgePoint. Tom Zucker can be reached at 216-342-5858 or at tzucker@edgepoint.com

A Business Owner in the Land of COVID-19

By Russ Warren, Managing Director, and Matt Bodenstedt,
Managing Director

Whatever else it brings, COVID-19 will be remembered as the germ that shut down America and changed the way we do business. Interesting times indeed!

We are learning more about the disease every day and how to treat it and prevent its spread. The curve will flatten and we won’t all perish. So, how is the economic landscape changing, and for what should the owner or manager of a middle market business be planning?

What’s Trending?

The health of the U. S. economy in the second half of 2020 and the outcome of the fall election will depend on the length of the shutdown and how well government, at all levels, handles the pandemic and its impact on the American consumer’s ability to spend (70% of the economy).

It will also depend on the innovation and perspiration of the American entrepreneur in adapting to the new challenges and opportunities and getting back to work. Here are some trends to ponder:

  • Supply chains are being re-examined and restructured for greater control and less risk; disadvantages of the ‘just-in-time’ manufacturing model are being exposed
  • Re-shoring of sophisticated manufacturingto the United States is gaining steam, especially of essential products, ingredients and components for healthcare and national security purposes
  • Tele-living is surging – working remotely, shopping online, telemedicine, virtual meetings, online education K-12 and beyond are all boosted by necessity and the wave of new home internet connections when schools closed
  • Companies are creatively applying their skills to provide new products and services – from autos to medical products, for example – based on changing temporary or long-term needs
  • The 11-year economic expansion has ended – sacrificed for a greater good; as Jeffrey Frankel, an economist and professor at Harvard said ‘the odds of a global recession seem elevated’
  • Oil prices have plunged – roiling the energy industry and slowing pursuit of alternative fuels, but lowering the cost of business for most other industries
  • New pandemic legislation can aid employers – offering bridge financing for many middle market businesses until the economy reopens
  • Easing the lockdown too quickly could trigger a second wave of infections – slowing recovery

Assess How the Situation Affects Your Business and Update Plans

What are key impacts on your customers, your employees, your suppliers and therefore your business?

We recommend you heed Ben Franklin’s old adage, “failing to plan is planning to fail.” If you are considering the potential transition of your business in the next several years, we encourage you to use this moment to refresh your strategic plan and prepare your business for a sale at the right time.

If your business is operating profitably through the pandemic and you see growth ahead, this is a most advantageous time to begin the sale process. Many buyers have cash and are looking for profitable, growing acquisitions – middle market companies and divestitures – the supply of which has dramatically shrunk in past weeks.

If this is not the time to sell, use some quiet time in your home office to prepare. EdgePoint recently conducted a survey of middle market business owners who sold their business and found that most owners wished they had begun planning for the sale a year sooner than they did. Here are some practical steps you can take now to assure you’re ‘transition ready’ when the market is.

  1. Pull together your latest five years of annual financial statements, and monthly statements for 2019 and forward to illustrate for potential buyers how your business was performing just before the pandemic, and how quickly you recovered afterward.
  2. Similarly, track key performance indicators (e.g. volume and productivity metrics) each month to better tell your story of response and recovery. When trying to decide what to track, ask yourself, is it actionable, or merely interesting.
  3. Open a Covid-19 Account (or series of accounts) for all one-time pandemic-related expenses which can be added back to more accurately reflect the cash flow available to a buyer. Also keep track of all owners’ compensation and perquisites.
  4. Develop or revise a budget for 2020 and strategic plan, and run multiple scenarios. You’ll be better prepared to make the difficult decisions quickly if they become necessary and to seize new opportunities for products, services and markets.
  5. Conduct your own Pre-Due Diligenceto make sure the future sale process goes smoothly. Now is a good time to go through all your contracts, insurance plans, leases, Board minutes and the like. Make sure you have complete, fully executed copies. Be sure to check termination dates, rights of renewal, and other key terms to determine if any action is required, then scan and store a copy electronically, using an appropriate filename. Finally, commit yourself to immediately digitizing and filing every new agreement so you don’t have to go through a major cleanup again!
  6. An experienced investment banker can help with a Transition Readiness Assessmentif desired.

Russ Warren and Matt Bodenstedt are Managing Directors of EdgePoint, with a combined 70 years of advising clients in the sale of their middle market businesses.

Russ Warren and Matt Bodenstedt can be reached at 216-831-2430, by email at rwarren@edgepoint.com and mbodenstedt@edgepoint.com or on the web at www.edgepoint.com