A Time to be Bought, a Time to Die

By Lloyd Graff

It seems like it’s the season for a lot of machining businesses to be selling out or auctioned off. I have worked as an advisor on some of these situations as well, so I have had an inside look at buyers and sellers contorting to get a deal done on an operating business. Selling a job shop as a going concern is really tough unless it is a big and growing business, blessed with depth of management and ownership that is clear about what it wants and decisive when an appropriate buyer materializes. Having a limited debt also helps because it keeps lenders out of the negotiations.

There are buyers constantly looking for deals for attractive firms. Often these sellers are businesses that have already been sold before.

A company I am familiar with near Chicago in the screw machine business started more than 60 years ago with three old Davenport multi-spindles. They may still have those Davenports, along with 100 other ones rebuilt several times, as well as Acmes and New Britains, even a few Brown and Sharpes. They have bought out many small players along the way, been highly disciplined on capital equipment purchases, built up a factory in Mexico, diversified their locations, avoided unions, and consistently rewarded their private equity owners. Their reward—being sold every five to eight years to a new private equity company that can take advantage of fresh depreciation to shelter cash flow.

For better or worse, this is the game for profitable job shops these days because private equity firms are decisive and clear about what they are looking for. For profitable businesses over $10 or $15 million in sales, private equity firms are usually vying against other firms like themselves because most other job shop owners do not have the expertise or banking connections to compete with them for clean, nonproblematic companies.

However, some job shop owners like John Habe IV of Metal Seal Precision in Mentor, Ohio, have decided to challenge the private equity guys on deals that are a little too small for them or that are turn around situations.

John has acquired several turned parts firms, most of them under the radar for private equity firms because they lack profitability or size. But they fit into John’s group of companies. They add value that is greater than potential auction value, or they have extra equipment that can be quickly turned into cash.

John has developed internal talent that can dissect the financials of a target like a private equity firm would do, and he has access to consulting firms to augment his own people. He also has his brothers as partners to run the day-to-day operations of Metal Seal.

Most job shops are not easy turnaround candidates or fertile turf for private equity groups. They usually end up as auction or liquidation situations, often dictated by a lender, but not always.

There are no perfect times to sell or buy a job shop. Often owners wait for a market improvement to build up their free cash flow numbers. Private equity buyers and most other potential buyers usually want to buy a job shop for a multiple of EBITDA (earnings before interest, taxes, depreciation, amortization). That multiple is usually 3-5 times depending on the buyer’s perception of the company’s strength.

This is not a rule set in stone. Businesses that are breaking even or losing money can be sold if they have some vital ingredient that other companies covet, like people, location, unique customer relationships, or unusual processes or licenses that are hard to duplicate such as nickel plating or FDA approvals. Sometimes a synergy with a company’s customer base enhances the value of a business.

Yet the sale of businesses as going operations is usually a long contorted happening. Lawyers always slow things down with cumbersome contracts which require other lawyers to untangle. Environmental issues often pop up. Family jealousies derail many deals. Often buyers and sellers dislike one another, and emotions count when family businesses are being sold to outsiders.

When you see the auction brochure of a competitor come across your desk it was probably a candidate for a buyout as a going operation at one time. In the end, at least one important missing piece led to its eventual liquidation.

Question: Will the 2020 election affect your business or job?

 

 

 

 

 

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3 thoughts on “A Time to be Bought, a Time to Die

  1. AvatarJeff

    If Trump loses I figure 1/2 of the wealth earned thru a 30 year career/business owner may disappear into thin social policy air. Our health insurance will cost 300K the next 15 years now, so maybe that will double too. We need the China trade war to cool down, the MX, US, Canada trade deal to get thru Congress. Never thought I would be listening to so many presidential candidates talk about how we need to move towards socialism. You may see a lot more sales of small businesses in the next year – trying to get out while things are still very good and taxes are at a reasonable rate.

     
  2. Avatarr in nyc

    Jeff sums it up quite well.

    We are lucky enough to be established, have specialized products, along with national as well as international customers that soften the peaks and valleys.

    We are BOOMING in this Trump economy!!!

    KEEP AMERICA GREAT

     
  3. AvatarRobert L

    I am staying out of the political conversation. Being in the auction business for 40 years, we do see opportunities in which companies can be sold as going concerns but fail. They often fail due to unrealistic expectation s of price. It is fairly easy to rapidly value the M&E but more difficult to value intangibles like IP, contracts and goodwill. Owners often value these items much higher than suitors due to uncertainty of the future and a disconnection to the eons of ownership’s blood sweat and tears that went into building the business. I think that some owners would rather liquidate than accept a lesser price than their personal valuation for items that have been their individual victories that built their businesses.

    Having said that, there are times when a business is actually worth more as components than the entirety. We are seeing that on several projects that we are currently working on. It is important to understand the component vs going concern valuations before making the decision to move forward on either front.

    Many business buyers today would rather buy product lines and individual contracts to tuck into their existing operations to leverage efficiencies, increase equipment utilization and round out their product offerings, rather than take over the entire business.

    RL

     

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