CMG M&A Insights from Recent Manufacturing Transactions

Over more than 35 years, CMG has represented hundreds of family-held and founder-led manufacturing businesses as they explore their ‘once in a lifetime’ capital merger & acquisition transactions.  As you may know, our team at CMG recently represented Gem Manufacturing and the multiple family shareholders in their recent transaction with the private equity firm Core Industrial Partners, whereby Gem became a platform for multiple acquisitions to build a powerful force in the precision, high volume deep draw metal stamping business.  

I wanted to take this opportunity to share some key insights that were reinforced during that process.

We hope that by sharing this information with you, we can help you be better prepared if you ever consider selling your business in the future. Whether you are considering a transaction now or ten years from now, our goal is to provide you with valuable sell-side advisor insights that will help you navigate the process as successfully as possible.

M&A Market: Current Valuations

Overall, the M&A market for metal stamping businesses has shifted from a ‘sellers market’ to a ‘buyers market’, but there is still ample opportunities for sellers to maximize value.   While peak valuations were seen in late 2021 and early 2022, valuations generally are higher than the longer term averages, but as in all industries, valuations for metal manufacturing businesses depend on the quality of the target. Are you an “A” “B” or “C” company?
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• Robust valuations continue for “A” companies (i.e., those with long term contracted revenue, serving non-cyclical industries, with accelerating end-markets, and defensible competitive advantages) especially those with a continuing strong management team.  Valuations are being driven primarily by active private equity investors who can help accelerate growth and further improve earnings.
• There is strong interest in “B” companies, (i.e.: those that have decent margins or a specific market niche but may have some operational challenges or transitioning management).  To maximize value, however, sellers may have to accept some form of contingent earnout payments (deferred compensation subject to achievement of performance hurdles).
• Investors have waning interest in “C” companies (i.e., project-based revenue, cyclical industries, shrinking end-markets, high customer/product concentration, low switching costs).  Sellers may still be able to partner with certain strategic buyers that can take advantage of synergies, but only “value” focused private equity investors would be interested.

Deeper Due Diligence

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Current market conditions are requiring buyers, investors and lenders to dive even deeper in due diligence.  The credit markets have certainly tightened since last fall (causing more scrutiny of risks), but strategic buyers and private equity investors are still eager to deploy record amounts of ‘dry powder’ capital, albeit more cautiously.  Beyond the standard legal and accounting diligence, other key areas of due diligence that have become even more important include:
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• Customers are the lifeblood of any business.  Buyers and investors will value long term relationships, enhanced by multiple points of contact, ideally under long term contracts.  Customer concentration and causal relationships based on ‘understandings’ are a huge risk for investors and will depress value.
• End market dynamics – Businesses that focus on growth end markets and are able to avoid cyclical industries that may be effected by recessionary pressures will be favored.  Traditional automotive stamping, for example, would be considered out of favor at the moment, however stamping of electrical connectors for electric vehicles could be much more interesting, given the expected growth in that market.
• Supply chain sustainability – Those that managed though the supply chain issues through the past couple of years and prove reliability will be favored over those that struggled.  Redundant suppliers and global sourcing (especially re-shoring and near-shoring) has become even more important than market driven pricing issues.
• Environmental Stewardship – Metal work can be dirty. Investors have become hyper aware of environmental issues and sellers will need to fully indemnify buyers for any environmental -issues.  Seller should be proactive and address any environmental issues (real or potential) in advance of a transaction to reduce any potential longer-term liabilities.  Performing a full Phase I environmental study would be a great place to start.

Foundational Data

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In addition to operational excellence, data has become more important than ever.  Enhanced reporting capabilities are now the ‘norm’ and future partners now require the ability to “go granular”.  Buyers pay more when they have confidence in the financial results, so a robust analysis of revenue is only the beginning.  
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• Everyone will review the standard reports of historical revenue and margin by product, by customer and by industry, but the best companies go beyond that to include the balance between informal relationships and formal contracted sales, the amount of (or ability to add) recurring or reoccurring service or add-on revenue, and the lifetime value of each customer.
• Buyers will challenge any set of projections.  Your historical performance, active pipeline and list of prospects collectively act as the backbone for future forecasts, so it will be critical to know the specifics.  The best companies have probability weighted sales pipelines, robust new product development activities and active new market development activities.  
• Operating KPIs (i.e.: scrap rate, run time, first pass yield, cost of non-quality, etc.) are now ”foundational” data.  Tracking KPIs are important but demonstrating continuous improvement over time will help maximize value.
• Perhaps the most important factor to mitigate risk and enhance value is a deep bench of capable management team.  Owners may want to consider offering employment contracts, with equity ownership opportunities, to their top management team members.  This serves both to both lock in quality talent, but also ensure a smooth transition post-closing.

Conclusion

Deciding to pursue a capital transaction should not be taken lightly. It should be considered only after a robust consideration of the company’s readiness.  The value of proper preparation and planning far outweighs trying to ‘time the market.’  Even in today’s dynamic market, prepared sellers can still maximize value.

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Looking For A Sell-Side Advisor?

Our CMG team is ready to help you in the process of selling your business.  If you would like to have a conversation about our recent experiences with other manufacturing companies, our insights of the current M&A markets or a confidential review of your business, please do not hesitate to reach out.  We would love to meet with you and start to develop a relationship so you can maximize the value of your business whenever you are ready.

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