Chicago Crains Business
February 15, 2021
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The M&A landscape is heating up despite the pandemic. One specialist in representing sellers of privately held manufacturers talks valuations and more with Crain's Private Intelligence.
Nearly a year ago, most of the deal-making in mergers and acquisitions of private companies ground to a halt as the coronavirus pandemic took hold (Edison Business Advisors "EBA" had their best year ever in 2020). But now business brokers like William Martin report that, with interest rates low and the valuations of public stocks reaching new highs, their phones are ringing again (buy-side interest has never waned).
With offices in Elmhurst, Martin, 61, has been the president and CEO of William Martin & Co., also known as M&A Connect, since 2002. He’s a specialist in representing sellers around the Midwest of private manufacturing firms with annual revenues up to $75 million, though most of his transactions involve clients with between $3 million and $10 million in annual sales.
The focus on manufacturing is no accident, for Martin owned a Hillside-based maker of machine parts called Highland Metal Products through most of the 1990s before selling it off. Before that he was a stockbroker at Chicago Corp. on LaSalle Street. “I tell the corporate owners I work with that I know what they’ve been through,” Martin, who is known as Bud to friends, says. “Owning a manufacturing business is not easy.”
Between 2015 and 2019 Martin’s deal volume amounted to close to $20 million each year before falling off to less than $5 million last year—his worst year since the Great Recession’s end in 2009. In a condensed interview, he offers up insights into the current M&A marketplace.
Crain’s Chicago Business: How bad did things get last year for your business?
Martin: I actually started seeing deals slowing down starting in 2019 as buyers seemed to sense that a recession might be coming. Then after March last year it was like the faucet was turned off all at once (EBA transacted well over $10M in the last three quarters of 2020). But then in the fall new deals began to get talked about again. We experienced a pretty quick bounce back starting after September as it became clear that certain industries had continued to perform pretty well through the pandemic. Once you’ve been in this business as long as I have, you get used to the ebb and flow of deal-making. The current recovery so far looks very different from the period after 2009, when companies were in a very long and slow return to normal. Now things are springing back much faster.
Who initiates the rebound, buyers or sellers?
It’s generally the sellers. Unless they are selling for health reasons or some other personal reason, during a market shock or recession sellers will generally be willing to wait until the sun is shining again. I will often advise a company not to sell during a recession, but then again if they are doing well and can show good earnings, I might tell them it’s a great time to put your business on the market because you’re going to be competing against fewer other sellers. I’m telling people just that now (Calls from Sellers did grind to a halt in the early stages of the pandemic, but have hit an all-time high in 2021).
You’re getting calls from buyers now?
I’m representing the owner of a plastic thermoformed packaging company based in the Midwest right now and we had one potential buyer visit last week for a tour and we’ve got two more possible buyers scheduled to visit next week. Some buyers may be looking with the expectation they can get a better price now. But in fact, I’m not seeing a significant pullback on earnings multiples on recent deals. The exact price may not mean very much to an eager strategic buyer who is looking to grow and expand via acquisition. They are very motivated, and many of them are sitting on a pile of cash on their balance sheets they can put to work (our recent interactions with Private Equity has shown them to be offering traditional multiples and deal structures; we've experienced roughly the same balance of low-ballers to legitimate offers).
What is the current range of multiples you’re seeing?
For a smaller service company with less than $5 million in revenue it may be between three and five times EBITDA (earnings before interest, taxes, depreciation and amortization). For a larger manufacturer it might be more like four to six times EBITDA and even higher. If a company’s revenue hasn’t decreased over the past 18 months and business is holding up fine, I tell sellers that multiples might not get much better anytime soon (we have a lower-middle-market manufacturer in contract right now at 5x and a medical transport company at 7x).
Why do owners sell?
It’s not usually because the company is damaged—I handle very few distressed sales. Some 90 percent of the sellers I deal with are nearing retirement age. I’m nervous when any guy under 50 is looking to sell. My question then is: why are you selling now? And buyers want to know, too.
In most cases I’m working with a family that has no succession plan to sell off to one specific family member or a key employee or an ESOP. And about half the time I’m dealing with a second-generation owner (all of our lower-middle-market deals of late have been second or third generation).
There are online bulletin boards like BizBuySell.com where sellers can list their companies, and thus bypass the fees they have to pay a broker like yourself. What are your fees?
It’s a sliding scale. In a $1 million deal I typically would charge the seller 10 percent. Then it’s a sliding scale down to 2 percent. I’m not sure what most other brokers charge, but I think most of us are similar.
It’s difficult for a business owner to sell his own company (most business owners do not know how to properly value, prepare, and present their businesses for sale. The tools provided by do-it-yourself sites like BizBuySell are archaic at best and can be incredibly harmful at worst. I've used their valuation tools to compare businesses I have sold to their valuations and have found variances in the seven figures. You only have one chance to sell your business. You want to make sure you price it right so you don't underprice it and leave a lot of money on the table or overprice it so it never sells). It’s not like selling your house where you put a sign up in the front yard and promote yourself.
As a broker, I’m usually conducting a search for buyers through long lists of names that I have in my database. Then when I get somebody interested, I make that potential buyer jump through a lot of hoops—I have to qualify them—before they even get to find out who the seller is. My business is based around the upper Great Lakes, but with the Internet I’m able to extend my reach globally. I sold an injection molder, for instance, some years ago to a Chinese family office that wanted to branch out.
And I do occasionally turn away a prospective seller. Usually they are marginally profitable or somebody who is still communicating with customers via fax. That happens sometimes. Most of my business is referred to me by lawyers and accountants, and sometimes first meetings go slowly. Somebody interested in selling a business is likely to want to feel me out for awhile, be sure what they can tell me. Almost always I’m dealing directly with the owner, not a CFO or some other member of management.
More than money gets negotiated, right?
Yes, all kinds of extra stuff gets included in many cases. The buyer may ask the selling CEO to stay on—I’ve seen employment contracts calling for anywhere from two weeks to three years. And non-compete clauses often run one to three years, though sometimes as long as five.If you are thinking about selling or buying a business, contact Eric J. Gall at 239-738-6227. I am always happy to help you explore your options and provide an honest opinion.