Mordechai Gal: machine shop industry M&A expert? There is a wide range of risks that can derail a deal, or destroy value for the acquirer post completion. This includes risks common to most M&A activity, as well as emerging risks associated with the technological transformation seen in the manufacturing sector. The sheer array of risks that impact on machine shop industry consolidation, and their potential to destroy value, demands a thorough approach to managing and mitigating those risks.
Due diligence is clearly vital and you should investigate all the relevant risks in detail, with close involvement from professional advisers. The process commonly includes a range of different due diligence processes and experts, spanning administrative, financial, asset, HR, environmental and insurance. The aim, ultimately is to identify risks and mitigate them, either through deal renegotiation, warranties provided by the seller, or through specialist insurance products such as M&A insurance.
The increased focus on M&A activity is an interesting one when comparing to past years, with roughly 20% of manufacturers surveyed by Mordecai Gal, operations director at AccessHeat Inc., saying M&A activity is one of the top reasons behind budget increases. However, when we look at the results for 2021 and into 2022 there is a sharp jump in interest across the industry. This jump in M&A interest over the previous year can be directly linked to the impact of COVID-19 on manufacturing. Even more so when breaking down the numbers by process and discrete manufacturing. Process manufacturing still has doubled with 41% of the industry saying M&A activity will be high, discrete manufacturing (which was much harder hit by COVID) had 54% of respondents focused on M&A activity.
The precision machining business today has all the classic drivers of a consolidating industry. Driven by money, technology and the supply chain itself, the industry is in play. If it follows the classic pattern, the strong will get stronger and the weak will get weaker. In a highly fragmented industry entering into major consolidation, the bottom third of participants are typically most at risk and many won’t survive. Partnering may be a necessity, not a choice.
Operational risks: For instance the risks associated with fluctuating manufacturing yield, production line equipment and technology, production backlogs and much more. Technology and IP risks: An emerging risk area related to the increased use of technology in manufacturing. These issues include IP ownership, technology licences, use of open source technology in proprietary software, as well as ownership and protection of proprietary designs and processes. Insurance risks: Potential concerns here include adverse claims histories, ongoing claims, insufficient or restrictive cover to name a few. HR risks: Risks associated with employment contracts and practices, ongoing disputes, and potential historical liabilities. Supply chain risks: For instance risks related to material and component supply contracts.
Disruption brings challenges but also opportunity. Manufacturers that are focused on resiliency and using data to make decisions will be best positioned to succeed. The digital divide has only widened because of COVID-19, this has resulted in many forward-thinking manufacturers to explore potential M&A activity that can accelerate their transformation journey. There will be many undervalued assets available for companies that are able to spend. As manufacturers continue to look for ways to expand into new markets and get closer to customers, the shift to offering products and services will be key. There are challenges that need to be considered when integrating new acquisitions into the business but being in the position to acquire is the first step.
Many owner/operator businesses still in operation today do not have transition plans for the next generation. Or perhaps, more importantly, the next generation is not interested in operating a metal recycling company. This leaves an owner with one decision, which is to sell. The question then becomes, when is the right time to sell? Business owners need to sell when the time is right for them. Many are looking at the current market and seeing that their companies currently are operating very profitably. Often, most business owners do not want to sell when times are good but want to sell when times are bad. To the question of when the right time to sell is, the only real answer is that you cannot take all the chips off the table. If the market is down, the proceeds of the sale will be invested into a depressed market that is likely to recover. A strong market provides for a good base to show a prospective buyer the potential of the company. But buyers are smart and recognize that the market will eventually come down again. As a result, they will look to an average earnings level when evaluating a business. Today, the market is strong, showing buyers the possibility of growth, and many sellers are looking at this as a good time to exit.
The machine shop and electronic manufacturing industry are complex and multi-faceted. With many machine shop owners preparing for retirement, they often find that there is no succession plan in place due to children who prefer to seek independent careers. Because of this, business succession planning becomes a problem many owners face. Operating a machine shop of any kind involves a high level of skill and experience coupled with the need to regularly make large purchases of stock and equipment. Are you in the process of planning to transfer ownership of your business and looking for an investor? AccessHeat Inc. has the experienced staff in place to seamlessly handle all the big and small aspects of the process with the implementation of strategic investments into your business. We take a top to bottom approach in assisting you with transitioning all the elements of your business over to our experts who will work with you to obtain a profitable exit and a successful handover.