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.
- 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.
- 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.
- 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.
- 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.
- 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!
- 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
Kenway Consulting has been recapitalized by Svoboda Capital Partners
By EdgePoint
EdgePoint is pleased to announce that it served as the exclusive financial advisor to Kenway Consulting, Inc. (Kenway) in its sale of a majority interest to private equity firm Svoboda Capital Partners (SCP). Financial terms of the transaction were not disclosed.
Kenway Consulting is a management and technology consulting firm based in Chicago, IL whose entire reason for existence is to help companies and its employees. Founded by Brian King in 2004, Kenway’s unique philosophy prioritizes means over outcomes and decision making that is grounded in integrity, quality, value and respect for all constituents. Kenway strives to provide all clients with unmatched quality and service, and specializes in the areas of Technology Solution Delivery, Enterprise Program Leadership, and Information Insight.
Kenway’s Founder Brian King said, “Going through the process of marketing and selling your company is, for most business owners, a once-in-a-lifetime experience. It’s a massive undertaking, with a steep learning curve and an abundance of emotion wrapped into a stressful condensed timeframe. Working with Tom Stafford, Tim Meaney and Max Halstead from EdgePoint was an incredibly positive experience. They flattened the learning curve with their experience and wisdom. They inserted themselves where possible to take work off my plate. And they handled my emotions with the right combination of patience, tough love and empathy. I wholeheartedly endorse their services to business owners considering their exit options.”
Tom Stafford said of the transaction, “Brian and his senior management team have built an impressive firm with a unique and inspiring culture. We are honored to have helped Kenway to identify and select Svoboda Capital Partners, an experienced and thoughtful financial partner who will preserve and enhance Kenway’s culture, while guiding the Company through the next phase of its growth and evolution.”
David Rubin, Principal at SCP said, “We are grateful to EdgePoint for helping facilitate our new partnership with Kenway. They went above and beyond to make the transaction as smooth as possible. Their experience, guidance and leadership were exemplary in getting us to a successful close.”
Svoboda Capital Partners is a Chicago-based private equity firm with over $400 million of capital under management. Founded in 1998, SCP invests in and partners with management teams to help build businesses in targeted niche industries including value-added distribution, business services, and consumer products.
EdgePoint is a leading investment banking firm focused on providing middle market businesses with merger and acquisition advisory services.
Is a Search Fund the Right Partner for your…
By EdgePoint
Sellers today have many options when it comes to finding the right type of partner to acquire or invest capital in their company. The number of strategic buyers seeking acquisitions, traditional private equity funds, family offices, and independent financial sponsors have increased the possibilities available to an owner wishing to transition a middle market business. But a less well-known buyer type – Search Funds – might be the best fit for certain sellers and their employees.
Owner Situations Favoring a Search Fund:
- Owner wants to retire or cut back after the transaction
- No succession CEO in the company/family
- Required industry-specific knowledge can be quickly obtained
- Company has low business risk
Conceived in the 1980’s and becoming increasingly common over the past decade, a search fund is a unique investment vehicle through which a group of investors, often with business backgrounds, financially support an entrepreneur’s efforts to search for, acquire, manage, and grow a privately held company.
The individual (or principal) of a search fund will typically seek to identify and acquire a single company in which he or she will assume an active day-to-day leadership role as CEO or President, once the acquisition is completed. Some sellers might prefer selling to an individual willing to take over their company, rather than selling to a competitor who might adversely impact employees or company culture. Search funds, by their nature, can help in instances where a lack of management depth might deter buyers who require experienced day-to-day management teams in place.
Some common characteristics of search funds include:
- Most search funds have a longer-term outlook than private equity funds that have shorter term requirements to return capital to fund investors. Search fund principals often choose to refinance out their initial equity investors and then stay with the company as a sole owner.
- Search funds typically prefer to target businesses or industries which seem insulated from technological change, have straightforward business models, or operate in fragmented geographical or product markets.
- The purchase prices of the company acquired by a search fund is typically from one or two million to $25 million.
- Search fund principals may come from diverse professional backgrounds including operations, sales, investment banking/finance, private equity, or general management careers.
- In a search fund, investors typically invest money in two stages: (1) to fund the search (i.e. to pay the entrepreneur a modest salary and cover administrative and deal-related expenses over a two- or three-year period while he or she searches for an acquisition) and (2) to fund the acquisition of a given company.
- Investors who contribute the initial search capital (often five to 20 institutional or wealthy individuals) typically have the right, but not obligation, to invest pro-rata in the equity required to consummate the acquisition. So, the certainty of close may be lower and the process slower than with a private equity or strategic buyer which has its equity in hand and more deal experience.
- Search funds may not offer the highest price and best terms in an auction process unless the company fits the search fund profile.
While search funds can offer certain sellers a good option in the sale process, finding and selecting the best groups to consider – and ultimately transact with – requires guidance from an M&A advisor. There are roughly 300 to 400 search funds in the United States. In our experience, it’s the search fund principal’s professional background, search history, investor base, lender support, and character that will ultimately determine the outcome of a deal.
The M&A market remains strong for a wide range of sellers. But like with most important decisions and processes, having another option to consider is a good thing.
© Copyrighted by EdgePoint. Tom Zucker can be reached at 216-342-5858 or at tzucker@edgepoint.com