Most sellers are wary of private equity. What a PE firm can actually offer a manufacturing owner, and when it is worth the conversation.
Why Manufacturing Business Owners Hesitate to Consider Private Equity
At Accelerated Manufacturing Brokers, Inc., most of our sellers are terrified at the thought of talking to, much less selling to, a private equity group.
And, more often than not it has to do with one or both of the following reasons:
- A perceived lack of concern for the legacy created by the seller
- An inability to trust them (the private equity)
I get it.
Why Private Equity Is Pursuing More Manufacturing Acquisitions
But you may be interested to know that we have seen a recent uptick in inquiries on our listings from private equity groups.
And, based on M&A industry data, as well as what we hear on the street, we expect that trend to continue. This shift is driven by a crowded, fiercely competitive marketplace for middle- and upper-middle-market investment opportunities.
As a result, these PE firms are looking for other investment options.
Private equity firms, in general, have a reputation for making an acquisition, then cutting costs, making numerous changes, and, in some cases, moving the company with little regard for employees or the legacy the founders have created.
The reality, according to Matt Pearson, Vice-President at Validor Capital, is “when transitioning a manufacturing business in the lower middle market, the likelihood of these things happening is almost non-existent.”
Understanding Platform and Add-On Acquisitions
PE firms making an “add-on” acquisition already own a “platform” company in the same or related manufacturing space.
To acquire an add-on, an organization may have great talent and tooling that appeals to the PE.
Alternatively, there may be a synergistic opportunity to broaden the scope of services they provide to current customers or gain access to a new market for the current company via the add-on company.
How Private Equity Can Protect and Strengthen Your Legacy
Private equity firms are highly motivated to spend wisely on the acquisition and the post-acquisition integration. Their MO is to present a cash offer, which is music to any seller’s ear.
They prefer to invest in solid management teams, but are not averse to investing in marketing or sales talent if necessary. They are also willing to deploy capital on expenditures with significant ROI.
Additionally, owning a platform company means they can leverage the platform's existing network of personal contacts, relationships, and distribution channels to benefit the add-on.
Finally, they may introduce technology and systems to improve plant and office production and efficiency, which may ultimately cut down costs and increase profitability.
All of this suggests that with the right private equity, your legacy could be safeguarded by a private equity firm or an individual buyer.
Building Trust During a Private Equity Acquisition
If you’re like most of our sellers, much of the business you conducted early on was formalized over a glass of bourbon or with a handshake.
Fast forward to 2018.
Many PE firms have teams of analysts who review tens, if not hundreds, of deals a week.
Technology has enabled them, and education has shown them, how to structure financial models to determine if, based on numbers, any one company may be worth learning more about.
And when they start asking questions, as they are initially mainly EBITDA-focused, it can feel like they are speaking a different language.
As a private equity deal moves along the decision-making continuum, from site visits to a Letter of Intent, formal due diligence, and an eventual Purchase and Sale Agreement, it’s important to work with a trusted advisor who can help navigate this process.
Choosing the Right Buyer for Your Business, Employees, and Community
PE’s buy businesses every day and we sell them.
At Accelerated Manufacturing Brokers, Inc., we are adept at navigating conversations and reading between the lines of emails and contracts.
Our job is to find the right buyer who understands your legacy and respects your commitment to your employees and community.
Whether the right buyer is an individual or a financially backed strategic company (a.k.a. private equity), you can trust us to help you make the right decision.
And if we believe that you, as an owner, and your company will be best served by aligning with an interested PE firm, we’ll let you know.