A Manufacturing & Distribution Owner’s Dilemma: Do I Sell or Do I Grow?
September 30, 2019
The M&D Industry Revolution
The economy is changing and standing still is not an option. If your company is not gaining ground, then it is losing it! Manufacturing and distribution (M&D) business owners in the middle market must choose between several financial paths, including investment in growth, merger and acquisition (M&A) activity and cashing in.
This article was developed because of the increase in M&A activity in the M&D Industry, to help industry business owners evaluate their own situation and create “the right” plan for themselves and their company. The article will explore each of the paths and address many of the questions you may have, help you find the answers and provide a direction to follow.
The M&D industry is expanding, becoming more complex and facing significant changes that will create both challenges and opportunities, thus making this a perfect time for business owners to make a decision. For instance, the rise of increasingly complex standards and regulations has driven brand manufacturers to seek partners who can handle their growing compliance requirements, as well as make investments in human resources, new equipment, more integrated information technology and other capabilities. You may need to ask yourself if these are capabilities you have internally, and if not, how and where you will acquire the skills, experience and competencies.
Rule of Thumb – Where to Start
Many executives and stakeholders are wondering what strategic direction is best for them. They can choose to continue to grow organically, or through acquisitions, finding partners or additional funding. Conversely, if their company’s value is at a high, it may be a good time to exit. As a rule of thumb, your own process should begin with a true evaluation of your situation, both business and personal; a discussion with your management team; and a brainstorming session with your trusted advisors (i.e., CPA, attorney and investment banker) who are experienced in guiding your type of business through strategic alternatives.
The advisors should understand your role in the industry as well as the needs of businesses of your size. Their role is like that of a “strategic coach” who can help you start the process and navigate the intricacies of transactions; they know how to sell and buy companies, how to get the most value from a transaction and how to leverage your assets in different ways—from a partial sale to a strategic alliance to raising capital.
Do I Grow My Business?
Once you’ve made the decision to invest in the company in order to keep up with demand, the next question is: How? Can I grow my business organically or do I need to add external assets to keep moving forward? Here are some of the basic strategies:
- Partner: Seek a strategic partnership to propel growth with expanded resources and/or capabilities.
- Secure Growth Capital: There are a number of sources of growth capital available. Selecting the right one for your business depends on your situation. Three of the most popular methods are: bank debt via a commercial loan at favorable market 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; and 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: You should only choose to acquire another company that will be accretive to the value of your business. You can start by developing a checklist of criteria that the acquisition should provide. Some key areas for consideration are adding product lines, distribution channels, capacity, capabilities or geography. Always consider the impact of additional customers.
- Organic Growth: Create new ways to increase revenue by using your existing resources more effectively.
Investing in growth is as much a personal decision as a business decision. Think about what your financial and lifestyle goals are. Here are a few questions to consider: What level of risk will an investment in the company put on your personal finances and liquidity? How long will it take for the investment to produce a return, and do you plan to keep the company for that long? Will the investment you are willing to make “be enough” to put your company in a more competitive position?
Do I Take Money Off the Table, and Sell My Business?
There are several options that exist to take money off the table. You can do a recapitalization or “recap” of the business that will reorganize the balance sheet and allow you 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 executing on a transaction. Your company’s capabilities could increase the strategic buyer’s scope in ways you may never imagine, substantially increasing their own value and paying you a lucrative multiple. Strategic buyers are drawn to make an acquisition for many reasons, some of the most common are: geographic or product expansion, vertical integration or product or customer diversification. For example, in today’s market, foreign strategic buyers are paying above market prices as a way to get into the U.S. market.
- Private Equity: There are also a large number of private equity firms who are active in middle market industries. If your transaction is structured correctly, these firms will purchase a portion of your company (some majority, some minority), allow you to take money off the table, stay involved and share in the growth. This is an appropriate hedging strategy for those who aren’t quite ready to exit and want to hedge their bets.
Selling your company, whether it be a full or partial sale, can be one of the most important financial decision of your life. After investing years in building your business, you will want to get the greatest possible value in return for all those years of hard work. Preparing your business for both of types of buyers will be key in maximizing its value.
What Is My Business Worth?
Whether you are interested in selling your business to a strategic buyer or a private equity firm, your advisors should be able to help you understand the value of your business. Be very careful about using the industry rule of thumb. The specifics of your business really impact its value. It’s important for you to understand the value that an investor sees in your company. If the purchaser is strategic, then you need to know how your business will impact the value of their business in order to obtain the highest valuation. A critical mistake that many business owners make is believing that an industry average multiple is the only metric to determine the value of their business. This is an incorrect assumption that has caused many business owners to “leave money on the table.” Multiples are just one factor that should be used to determine enterprise value. Your investment banker will help to determine other value drivers in the business. The correct positioning of these value drivers will increase the appeal to perspective buyers, maximizing the value they see and are willing to pay for.
When it comes to operating strategies that lead to profitable growth, there is one simple principle: Run your business like you are NEVER going to sell it. Only then can you make effective decisions that build off one another to form a solid platform from which to grow. However, the real trick is to simultaneously run it like you are going to sell it tomorrow. That’s the magic that keeps the right people interested.
All in all, acquisitions and divestitures represent great opportunities for middle market businesses to take advantage of the changing market. 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 that understand the steps, can navigate the process and bring value to whichever side of the table you end up on. We recommend consulting with experienced professionals, including CPAs, attorneys and investment bankers who can help guide you through the process.
M&D Intelligence - Q3 2019
- M&D Migrates to RPA Implementation
- A Manufacturing & Distribution Owner’s Dilemma: Do I Sell or Do I Grow?
- Preparing for Sale – Financial Due Diligence
- EisnerAmper Q&A with Michael Corridon, CFO, Strato, Inc.
- FASB Proposes One-Year Delay of ASC 842, Leases, (ASC 842) for Private Companies
- State Tax Changes Impact M&D