Episode 48: Manufacturing M&A Market Update

In this episode of The Sound of Automation podcast, we sit down with Colin Johnson from Wipfli Corporate Finance (WCF). Bryan and Colin provide a manufacturing M&A market update and overview of the competitive landscape. They also offer advice on how to determine if your business is ready to sell, or if you should instead focus on ways to grow your business. Listen in to learn why it's so important to define your goals and surround yourself with a well-rounded support team to help you think through your options and develop the best path forward.

For more information on Wipfli, please visit our website at:
https://www.wipfli.com/manufacturing. You can also contact us here.

Transcript

Colin Johnson 00:00

The answer is not just yes or no, it's if it's yes, why? And if the answer is no, what are you going to do to grow?

Podcast Intro Narrator 00:10

Welcome to The Sound of Automation brought to you by Wipfli, a top 20 advisory and accounting firm. 

Bryan Powrozek 00:30

Hello and welcome to the Sound of Automation. I'm your host, Bryan Powrozek. And today we'll be talking a little bit about, at least at the time of the recording here, it's getting into early fall. So a lot of people's attention starts focusing on planning for the next year. And we thought it'd be a good opportunity to bring on one of my colleagues, Colin Johnson from Wipfli Corporate Finance to just kind of talk about one of what we think is gonna be the bigger things people should think about for the next year. And that is kind of what is happening in the M &A market. If you're a business owner and that opportunity might be on the horizon for you or is even just something you're thinking about, now's a great time to start giving that some thoughts. So Colin, thanks for joining me today. Yeah, of course, glad to be here, Bryan. I guess if you wouldn't mind just giving everybody a little bit of your background and kind of just talk about how Wipfli Corporate Finance helps small to mid -sized business owners. 

Colin Johnson 01:23

Sure. So we're Wipfli Corporate Finance, which can be a confusing term, but what it really means for us is we're investment bankers that help primarily privately held businesses sell or part of their business. So we are tasked with helping people make smart decisions of whether to sell their business, hold their business, and continue operating or grow their business by acquiring other businesses. So we spend a lot of time trying to navigate. One of the themes we'll talk about today is uncertainty in the market and try to make smart decisions and do that proactively rather than reactively. 

Bryan Powrozek 02:04

And I like what you mentioned there, because I think in my interactions with business owners, if you talk about investment banking or anything like that, automatically the kind of defense barriers go up. So I'm not ready to sell, I'm not thinking about that. But as you kind of alluded to, it's a great resource to bring in and talk to just to get that temperature check, right? To understand, hey, what's out there? What are my opportunities? Am I ready to sell? Am I not ready to sell? And because of your experience, you've seen enough businesses, you know enough to, as we were talking yesterday, there was a company that you met with where it's like, hey, this just isn't the right time. This isn't, there's some other things you need to be doing. And so I think that's a great added service that you all can bring to the table. 

Colin Johnson 02:53

Investment bankers can get a bad rap. We're not all created equal. But if you find one that you trust, and we certainly try to fill that role, we can be a really good, unique perspective on where the market's at, what the competitive landscape looks like. And in a wild oversimplification, I talked to people about, we want people to have a smart decision and path forward. And if you were sitting on, 90% of your family's net worth was in Apple stock, but you couldn't get access to the ticker of what it was worth, you're not positioned to be able to make a smart decision. Some of our best meetings where we earn the most trust are where we frankly tell people now might not be the right time. Here are four or five other things you might think about or might consider doing. And that could be opportunities to improve the business. That could be internal transition. That could be transitioning to management. There's a lot of options. So we are specialists at navigating those and seeing the puddle before people hit them. Because next one, you can make a dramatic difference by being ready for those types of decisions from prior preparation. 

Bryan Powrozek 04:11

Let's dive into a little bit just on kind of some of the major trends you're seeing. I think you kind of hit on one of them there in your introduction, that uncertainty, right? That's probably the name of the game right now is there's a lot up in the air. So I guess what are you seeing when you're looking out into the manufacturing market? 

Colin Johnson 04:31

Yeah, it's been a while, let's say 40 years. We had COVID hit and people, you know, we were doing really well economically, COVID hit and M &A paused for most intents and purposes. And then we went into 2021 with some anticipated tax change and we had a record M &A year in which a lot of deals got done, but providers, people in my seat, people, attorneys, people on the accounting side that support transactions were at capacity. And buyers also, they were passing on a lot of deals they might've entertained because the M &A market is a supply and demand function, right? So the supply of deals was incredibly high and, you know, there just wasn't the, the Python wasn't big enough to get them all through. So then we went into 22, we had, you know, Ukraine kick off, we had inflation, capital debt markets got very tricky to navigate. Uncertainty is incredibly important, especially on the leverage firm. Uncertainty with interest rates, which we can talk about a little bit is incredibly important. 2023, and we had SDB to kick off the year, which was a ton of fun for everybody involved in the M &A market. And, you know, now we're looking at, hopefully we're in a spot. You know, we started 24 off, people were anticipating six, potentially six rate cuts this year in some cases. Now, I think, you know, people are thinking, maybe hoping's the right word for two, right? And we've got some political uncertainty. So I think there is a consensus that we could be in a spot to have a productive year in the M &A market in 2025 and really kind of unleash some of that deal volume. But there's been a lot of uncertainty that have kept a lot of private and private equity backed businesses out of the market, frankly. I don't think I mentioned this to you. One of my favorite lines, and I'd attribute this to a Goldman Sachs investment banker, but he said, M &A is aligned visions of the future. And it's a dramatic oversimplification again, but uncertainty corrupts that immensely. So more certainty that the more fluid M &A market will be. No question. 

Bryan Powrozek 06:49

Yeah. And as you mentioned, I was listening to a podcast the other day where they were talking about, you know, the potential rate cuts and what does that look like? Is it successive quarterly rate or quarter point rate cuts? Is it a half and then a quarter? And so all that, you know, as a business owner trying to plot through that, you know, it's like with any investment, right? You don't want to be the last one. You also want to be the first one sometimes. And so trying to judge the right time to do that. You know, specifically something else you mentioned there, you know, as it is related to the pandemic and kind of what you've seen there. Is some of that hangover from the pandemic, you know, showing, I'm thinking particularly in terms of nearshoring or reshoring jobs, you know, it seems like there's probably a lot of interest of getting some manufacturing back here in the US or at least, you know, to the Mexico, Canada, United States areas. 

Colin Johnson 07:44

Yeah, there has been a lot of fronts. And when we're looking at a potential prospect, we're spending more time than ever on the front end, because every situation is so specific to the owner's personal life, even where the business is at to where the industry is at to what that competitive landscape is. So I'd say, you know, even double the time we would have pre COVID in terms of assessing a specific situation, the importance of COVID absolutely magnified the importance of having a reliable supply chain. I think there's also been around the world, some nationalization of industry. And I think, you know, for a number of reasons, and one of the things we try to do in managing business or an M &A process is reduce risk. And I think the US North America has become one of the least risky places to invest in businesses for a lot of reasons, which has definitely triggered interest and demand for investment in domestic manufacturing businesses. 

Bryan Powrozek 08:53

As you mentioned there, in an attempt to read those tea leaves, you're feeling that 25 should be an active year. You've got both sides of that, right? Maybe I'm the business owner that thinks I'm five years or so out from an exit, so it could be a good time to get yourself ready and go. Conversely, maybe I'm that owner that's looking to make an acquisition. You got to watch because you could then also be competing with a lot of other prospective buyers on that add -on that you might be looking to pick up. Are you seeing a similar thing for buyers and sellers in 25? 

Colin Johnson 09:32

Yeah, I think there will be. I think the last stat I saw was 56% of deals are with non -private equity backed or financial sponsor backed entities, so private business owners. And I think that signals a couple of things. I think buyers have picked up on add -ons. There's less risk in a certain way on an add -on to their business. I think there also has been a focus on the ability to win with operational improvements rather than financial engineering as interest rates have climbed. So I think there have been opportunities for both. On the seller side, we are continuing to see strong premiums for quality companies. So there's companies that are positioned. And when I say quality company, I mean the classic good management team, good growth or growth prospects that are credible and good margins or opportunities for increased margins. And I think we're seeing buyers respect that, but it has to be real. Both parties, buyer and seller, are very smart in this. Because if you're considering this as an owner, it's not just should I sell now. And that's what we work really hard to make sure people have a smart answer. You're probably hearing me say that five times in this podcast. But a smart answer is not just yes or no. If it's yes, why? And if the answer is no, what are you going to do to grow, sell or grow? And so we try to help people think through it that way. Because if you don't sell right now, you're taking business risk along with market risk. And that may be the right answer, but it needs to be, it should be thoroughly vetted. 

Bryan Powrozek 11:17

You know, it's interesting to say, I guess it's regardless of where you fall on the political spectrum, right, you know, and I think I was talking to Adam this one time, he was basically saying when he looked at it, it didn't really matter which party won overall, in terms of how the economy responded. It's that, you know, if there was, you know, in more often than not when a party controlled, you know, and was able to, so now you know, you've got that clarity, right? Okay, at least we know this is what the priorities are going to be for the next four years and, or at least the next two years to the to the other election cycle comes through, you know, this is going to be the time when the uncertainty kind of drops, maybe to a minimum, you know, there's always going to be some uncertainty, but we at least get through the election, we start seeing what's happening with interest rates. So how do you suggest to business owners to try and take advantage of that in their their year and planning for this year, to really start getting ready, just to have that conversation, right? Again, doesn't mean you're in a cell, it doesn't mean you're going to hold, you're just going to figure out what's best for your particular facts and circumstances and the general market. 

Colin Johnson 12:27

Yeah, I think, you know, the M &A market has traditionally closed the meaningful amount of deals in Q4 of an election year. In the lower middle market, it's harder to move that quickly and be ready for that timing. But for the first time, we're implementing a, we talked about this a little bit the other day, Bryan, a structured year -end planning tool to help people think through that. And to me, it's a function of who is your team. And as you mentioned earlier, an investment banker, if you call me and there's a chance of helping you exit your business, somebody in our role, us included, will put a ton of homework in and show you the research we've done and help you understand what the market looks like and what the opportunity is. We will do that, others will do that, but we're leaning in and doing that. And we will get enough people out of that that will be, hey, this is a good fit for us, this is the right time. And other people, we will help a lot. So I think an investment banker can be a really smart resource that doesn't cost a lot up front, frankly, to get a sense of where the market is. I think we talk about a board of directors or that can be a peer group also, and in some businesses that can be more appropriate. But having a group that provides perspective and accountability to help you think through things. I think a tax advisor that can help start thinking about what an exit might look like, so you can understand the implications of that. A wealth advisor for obvious reasons, so you've got time to get ahead of that and plan. If you've got a general business counsel, I think having an M &A counsel connection is important, too, to help you think through some things. But I think in terms of getting ahead of it, one of the things we're talking about is team in that discussion. We're talking about valuation and what the market looks like, so people understand that. We're talking about their business performance and what their opportunities are going forward to help factor into the cost benefit or pros and cons of sell now versus grow and what lies ahead of them. And then the most important really is what are their goals? That's very, very specific, but often not paper, right? Personal goals, it could be goals for the employees, it could be goals for other stakeholders, it could be goals for the customers, it could be charitable. But really defining those and a couple things can happen. We've had clients that have defined those and we've said, hey, if that's really what you're trying to do, we can do that right now. The market will support that right now. If not, how do we get a plan to get there, right? So that's, again, for the first time really putting a structured plan to walk people through this because I think as this year, as we expect the markets could open up next year, and we're going to come through, again, whatever side you're on, a relatively turbulent election for obvious reasons, I think planning is going to be more relevant than ever for business owners. 

Bryan Powrozek 15:32

Well, and I think I had I had read somewhere once before, I don't remember the exact figure, but it was it was somewhere in the neighborhood of 75% plus or minus, give us a margin for error there, but but that like 75% of business owners who sold their business had some level of regret after, you know, a couple years after the transaction. And that was, and what the the article or what they had attributed it to, was it was exactly what you talked about the planning, right, that they either they felt they could have got more for the business or they didn't know what they were going to do, you know, the the owner had spent their entire life building this business. And now there's this huge hole that they don't know how to fill they have no other hobbies, they have no or anything else. And so that was kind of the crux of the article is that all of the when you break those reasons for being unhappy with the transaction down, it wasn't the person they hired to represent them or the the product, it's that they they didn't know what they wanted out of the transaction, be it monetarily, psychologically, they wanted their people taken care of, but whoever they sold it to closed up shop and let everybody go, whatever the case may be. So with those kind of numbers, it just underscores the importance of starting these conversations as early as possible and really crystallizing that idea for yourself. So you know, you're doing the right thing when it is time to when you get that knock on the door, and somebody makes you an offer you can't refuse. You're not kind of caught flat footed and in starting to think about it at that point in time. 

Colin Johnson 17:04

Yeah, when you came out with that number at first, I was like, oh man, I hope that number doesn't feel right for my clients. But we We work really hard. The first thing we talk about when we're even in a planning meeting, the very first page of everything we put forward is, what are your goals? And when you run a transaction, we're in a quarterback role and responsible for coordinating a lot of different perspectives that impact the outcome of that. I can't do what a wealth advisor would do to help a client maximize where they're at post transaction, but I can help coordinate it. Our goal, and it should be for any of these transactions. This was noted from one of my favorite attorneys we work with. He said, we don't have to be great friends when this closes. He's like, I want you to think the world and meet two years post transaction. That's how it should be thought of, but not like day one, not even day one of the process, day one of the meeting. That's the approach that your team needs to take to maximize what this looks like. 

Bryan Powrozek 18:08

Yeah, and I think it was a great piece of advice you mentioned, kind of building that team around you, right, somebody that understands the M &A side, the legal side, the tax implication, peers, if you belong to an association or something, you got some peers to talk to maybe been through this before, at least in my experience, and I know this isn't the case for everything. But, you know, a lot of the owners I've seen go through these transactions, their, their specialty was the business, right, they knew how to build the best widget, and, and had they had the time and the inclination, they could probably do what I do or do what you do, but they decided they wanted to go down this path here. So you keep focused on that, bring the experts in who can help you, you know, identify where you need to take the business. And even if you don't end up selling, this touches back on something you mentioned earlier, but, but I've seen within my own client base, is a lot of those things that are going to be discussed around the table of maybe it's improving the quality of your bookkeeping, or it's getting a better handle on your profitability by project or by product line or whatever it might be, those things are not only going to drive the value of your business when you go to sell it, but it's just going to make your business more profitable, more effective. And they're the things most business owners probably want to do anyways, but they just, those always get put to the back burner when the fires come up. And so, you know, this gives a little added encouragement for it's finally time to tackle that that project and get that done. So that you know, if you do want to go to market a couple years, it's done, you've got a track record of being able to do it and show how you use that tool or whatever it might be. So that that advisory board can really help provide that perspective from people who aren't caught up in the day to day running of the business. 

Colin Johnson 19:53

Yeah, no question. And you can't, you can't tackle all of those things at once. No. So you have to prioritize and having a well -rounded team can help you prioritize even in a smart way and maximize your efforts because we know what results in value in an M &A transaction, if that's the path that you end up going on. So if you're going to, if somebody's going to sell in three years, I'll take that meeting all day to build a relationship, help them think through it and do the right thing for a prospect and that perpetuates itself, right? There's a very funny misconception and funny to me, if you're investing in any asset, you're concerned about the future cash flows of that asset. As simple as that sounds, so many people will anchor on their historical cash flows and historical cash flows are relevant for why the future cash flows can be credible, but that future story can be impacted by uncovering levers that can be pulled or prioritizing different efforts. And that makes a, I can't even tell you a massive difference in the outcomes of these transactions. 

Bryan Powrozek 21:05

Excellent. Well, Colin, I really appreciate you taking some time coming on with us today. Obviously, if this conversation has sparked some interest with any of the listeners, they can locate you on the Wipfli website, reach out to you. You'd love to take that phone call and see if there's anything we can do to help. 

Colin Johnson 21:26

Of course, we're built for it. So if we can be helpful, we'll be there. Really appreciate you having me on. 

Podcast Outro Narrator 21:33

Thank you for tuning in. Don't forget to like us, subscribe, and share on social. To learn more about Wipfli, visit us at Wipfli .com. That's W -I -P -F -L -I dot com. Perspective changes everything.