We’ve written previously about The 4 Key Components To An Offer To Purchase A Manufacturing Company. While great information was contained in this article, we’ve watched two great buyers lose deals in the last two months to their competition. In this article, we’ll examine the missing element, which was the deciding factor in these two recent deals. If you’re buying a manufacturing company, here’s how to win if you’ve got competition.
Consider Who Is Selling Manufacturing Companies:
Most of the manufacturing companies we sell have revenues between $3-$30 million. Our clients own companies that they started from nothing and built organically. They are non-union, anti-big corporations. When I say “anti-big corporation,” I mean that both the owners and the work culture they created are no-nonsense, decisive and they move with entrepreneurial speed. I love the description I used in a recent article entitled, “American Manufacturers – Renegades, Rebels & Industry Disruptors,” to describe our typical client:
“These savvy entrepreneurs are our nation’s renegades & rebels who would rather work hard for themselves than make someone else rich doing the corporate thing. They call their own shots, manufacture their own destinies and contribute big time to the health of our economy.”
In order to conclude a successful transaction with these companies and their founders, you have to know how to approach them. Before I continue and outline what caused these two great buyers to lose the deal, let’s take a look at who is buying the lower middle market manufacturing companies in today’s market.
Consider Who is Buying Manufacturing Companies
For lower middle-market manufacturing companies, we’re seeing two categories of buyers, above all others. The first is executives leaving corporate positions in very large, sometimes publicly traded companies. They are typically younger baby boomers in their early 50’s seeking to acquire their way into business ownership. Their plan is to build the business they buy over the course of the next decade, and then sell as their parachute into retirement. The second category is the same as the first, except that once they got a taste of business ownership, they wanted more. They’ve acquired and are scaling up multiple manufacturing companies, usually with complimentary services.
The common thread between the two groups is that they come from BIG corporate America. Have you guessed the problem yet?
Defining The Problem
In both of the instances I describe in my opening paragraph, the buyer’s Letter of Intent was vague and the purchase price was not clearly spelled out, rather “to be determined” by complicated calculations. In both instances, my client really liked the buyer. We asked one to go back and restructure the language to be clear and concise. Each time, it got more complicated. A company representative explained that they couldn’t define the purchase price until they completed due diligence, in case they found something wrong. The problem with this is that a Seller isn’t going to take his business off the market and say goodbye to other qualified candidates for a “maybe.” A Letter of Intent is not binding on a buyer, but it is on a Seller. If the buyer finds the information previously provided to be inaccurate, he can back out of the deal. The LOI protects the buyer from something going wrong in due diligence. Therefore, there is no reason not to spell out the specifics of the offer.
In the second instance, the potential buyer never got a second bite at the apple. My client read both LOIs and made an instant decision to go with the one in which the language was clear and concise. Here’s a sample of what did NOT work:
“The valuation of said assets will be determined by a valuation calculation as presented herein, based on the intangible asset of goodwill structured around a cash flow multiple determined by the historical Profit & Loss statements, using a midpoint of the averages of both the 3 and 4 years prior P&L results of operations commencing from 2013 through 2016 and based on the historical data as presented by the Sellers, and substantially as formatted by the Buyers, as attached herewith. The allocation of said asset purchases will be distributed in a manner as presented herein as determined by the applicable valuation accounts as of the closing date of the purchase and sale agreement….”
In contrast, the bid that won simply said:
- I will pay X
- I will pay the purchase price in the following manner
- I will need X number of days to conduct due diligence
- I will obtain financing by this specific date
- I will close the transaction no later than this specific date
Of course, it contained more than that; however, the most important points could not have been presented any clearer.
Do you see the difference in the approaches? The bottom line is this – if you are buying a manufacturing company and you want to beat the competition, keep it simple. You might be buying a rocket component manufacturer, but a kick-ass letter of intent isn’t rocket science. Be clear, be concise and remember that the guy on the other side of the transaction doesn’t get your “corporate speak.” Say what you mean, mean what you say, and do it with fewer words if you want to win.
A good business broker or M&A professional will help you through the process of submitting an LOI that won’t offend, or worse, lose the deal. Often we’ll ask for a buyer to address a certain issue, which we know is a “hot button” with our client before submitting the LOI. Many buyers find their way to us in frustration, after having lost a deal. Has this happened to you? Contact us today to learn how Accelerated Manufacturing Brokers, Inc. can help you get to the finish line.