Manufacturing snapshot: A quick take on strategic growth

Buying or selling a business and expanding internationally are two key ways to achieve strategic growth. Recently, I participated in a "Fireside Chat" with Dwight Morgan, vice president of corporate development for plastics distributor, M. Holland, to discuss M&A activity, global opportunities and risks, and the importance of good due diligence. You can watch the full conversation, hosted by Plastics News, here>>. In the meantime, here are three key takeaways from that conversation.

M&A: High multiples, strong competitive advantages

The M&A market has been strong since coming out of the Great Recession, and many companies have entered new international markets through strategic acquisitions. We've seen a slight uptick in activity this year compared to last year, with more than 160 transactions in the plastics industry alone. We're seeing a similar uptick among other manufacturers, particularly in automotive.

As a result, valuations are high — rarely below multiples of six and sometimes reaching double digits. One factor driving that is private equity. In the past, business owners tended to sell to friends or family or to the management team. Now, there's a whole new group of prospective buyers out there — some two thousand private equity firms — with hundreds of millions of dollars to support transactions.

Valuations are high — rarely below multiples of six and sometimes reaching double digits.

Often, these transactions are a means of growth, to take the company to the next level. In some situations, it can be easier to buy that growth than to build it, especially if you're looking to expand into a new industry, a new customer segment, or a new geography. When you're acquiring, you want to look for increased competencies — adding skillsets in new processes or new technologies, for example — not only for increased asset utilization.

Global expansion: Opportunities, risks, homework

First, the opportunity. Businesses commonly consider taking their first step across borders because they're following a customer. It's a way for them to stay close to that customer and continue serving them from another country. Another common reason is for a lower cost structure.

But, there are uncertainties. You need to be aware of certain tax risks, both in the United States and in the country you're going to. Preparation and planning are so important — you have to have someone help you understand what the requirements are, and the associated risks, so you're clear about how to account for and comply with them.

Culture is a big issue, too — a different language (sometimes multiple languages), different laws, different customs, and different ways of engaging in commerce. You need to do a lot of homework on these aspects of operating in another country before you jump in.

Due diligence: Clarify objectives, clean house

If you're acquiring a business, you need to be clear about why — what do you want to get out of it? What's your objective? What's your timetable for meeting that objective? Do you have the capability to harvest that objective? Are you tracking the right KPIs to address these questions? No matter how much due diligence you do, you really don't fully know the business until you're in it for a while. Sometimes, there are surprises. Being clear about your objectives helps minimize their impact.

Private equity investors with very strong expectations will often pay a premium. As the seller, you can't expect things to stay the same after the sale. There will be a lot of changes so the buyer can maximize the value proposition and get their return — things are going to be different, and there's going to be accountability.

If you're thinking of selling, clean up the house — at least a year or two in advance, three if possible. Make sure your inventory and receivables are verifiable; segregate personal from business assets; make sure taxes are up to date, and you're in compliance with regulations. If you're not sure which critical areas to address, seek outside support. The less explaining you have to do in your confidential information memorandum, the greater the value of the sale.

Sound planning is critical

Optimizing opportunities to buy, sell, or expand overseas can be tricky; the details can easily distract from running the day-to-day business, especially if you're not working with an investment banker. Preparing for expansion or a sale takes significant preparation, not only from the accounting and financial perspectives but in terms of personnel and operations, too. Sound planning is critical, although — as you might expect — even the best-laid plans are subject to change.

Considering international expansion, an acquisition, or a sale? Listen to the full conversation>> and, as always, if you have questions, feel free to give us a call.