Supply Chain Disruption Leads to Surge in Manufacturing M&A
Impact of COVID-19 and Low Interest Rates
by Julie Wondra, CPA and Sean Kennedy, CPA, CFE, ABV
It may seem counterintuitive during a pandemic, but merger and acquisition activity among small and medium-sized manufacturers has kicked into high gear during the past year.
In some cases, unsolicited offers from buyers have come to owners who had no intention of selling, but strong prices have moved the process forward.
Whether or not a sale has been planned, there are several key considerations for owners of manufacturing companies who find an offer on the table. And it’s important to understand why this flurry of M&A is happening now.
Why the Increase in M&A?
The increase in M&A activity among Midwestern manufacturers is more pronounced among small to medium-sized businesses in the revenue range of $10 million to $100 million, and in certain subsectors. Plastics and equipment manufacturers, in particular, are seeing a lot of activity.
Generally, manufacturing companies appeal to buyers and entrepreneurs because of the ease of transitioning into their revenue streams and processes. They are particularly appealing if they source 100% of their raw materials domestically.
Moreover, banks look favorably on deals with manufacturers because they involved equipment and inventory – assets that support the underwriting of loans. Healthy manufacturing companies also produce good cash flow and qualify for a variety of tax incentives.
Fallout from COVID-19
The current M&A trend represents a confluence of circumstances, including fallout from the COVID-19 pandemic.
Supply chains were strained by the pandemic as raw materials and components became scarce in 2020. This is especially true of goods that are traditionally shipped from China and other countries, but also some from within the U.S. In some cases, buyers located on the East and West coasts sought supply chain solutions in the Midwest when their traditional suppliers were shut down due to the pandemic. There were few shutdowns in the midwestern states, so many midwestern manufacturers gained new customers and increased sales during the worst of the pandemic as their West Coast and East Coast competitors had to shut down.
For buyers, this created an opportunity to make acquisitions that could create synergies and offset supply chain problems. Acquiring component manufacturers in the Midwest could create efficiencies and contain costs by guaranteeing the supply of component parts, helping build market share, or diversifying product lines.
To help strengthen the economy in the wake of COVID-19, the Federal Reserve Bank has indicated it will keep short-term interest rates low at least through 2022. The assurance of cheap lending is expected to stimulate more M&A activity in many industries, including manufacturing, for at least the next year.
Key Considerations for Sellers
For manufacturers faced with a healthy purchase offer, several key considerations are essential to ensure the best outcome:
- Contact your trusted advisors, including your accountant and your attorney, early in the process. They can help you weigh the offer and determine if it fits in with your company’s strategic plan, as well as your personal plans as an owner. Moreover, if you decide to move ahead they will advise you on one of the most important aspects of a sale – the deal structure. How the sale is structured will have a significant impact on the tax considerations for you and any partners you may have.
- Have a business valuation performed. You can’t know how good a buyer’s offer is unless you know the true market value of your business. Discuss with your advisors factors that may not show up in a valuation, such as key personnel, workforce issues, whether new equipment or technology is needed, and future sales opportunities, among others.
- Get your financials in order. That means removing any personal expenses from the company books and making sure the financials and tax matters are up to date. The buyer’s lender may require audited or reviewed financial statements. If so, now is the time.
- Finding the right buyer is just as important as receiving the best offer. The sale will likely involve a multi-year earn out process. Investing the time in finding the right “fit” to work with on a day-to-day basis as you transition out of the business will significantly increase your chances of a success.