Punching Out! Case Study—Lessons on a Deal

This is a story of one of our clients, a U.S. contract manufacturer that sold a few years ago. To maintain confidentiality, the names have been changed and the details slightly modified.

The two owners of Western CM founded the company in the ‘80s, and after 30+ years they were ready to retire. Revenues had climbed to $15 million, and EBITDA was around 10%. Customers were in the military, wireless, industrial, and commercial sectors. They were contacted directly by several buyers, and went down the road with a few, but each deal fizzled out. The owners then contacted our firm to take them to market. Because the company was prepared, we quickly developed the confidential materials.

Unfortunately, as soon as we got to market, Western’s largest customer (30% of revenues) decided to move half of their production overseas. We mutually decided to put the sale on the back-burner.

Western had already started an overseas sales group, and as a result of losing that large customer, they doubled their efforts in this area. After about a year, the domestic business was up, and the overseas business was making great strides. Since the business was doing well, we updated the materials and went back to market.

This time around, Western’s sales and profits were doing well, and we received a wide range of offers. The initial offers ranged from 3–6x EBITDA, and from 50% cash to 90% cash at closing. Buyers ranged from private equity firms, to strategic buyers, to wealthy individuals. In the end, we signed a Letter of Intent with a strategic buyer at 4.5x cash with 1x EBITDA in an earnout that was based on sales goals. The deal was on a cash-free, debt-free basis (sellers keep cash, pay off debt), net working capital was included in the deal, and it was structured as a sale of assets. The owners had a 6-month services agreement after closing.

The buyer was interested in Western because of their location, key capabilities such as mil/aero, and their overseas experience. Many buyers in the PCBA sector are more interested in consolidating companies into the buyer’s facility, but in this case the buyer wanted to maintain the business as a going concern (which was important to the sellers).

Due diligence mostly went fine, although we found out that the company’s trademarks were in the owners’ wives’ names. No one could remember why they did that 30 years before, but we were able to handle that issue without any delay in the process.

However, about a few weeks before the scheduled closing, the son of one of the owners decided that he wanted to keep the company in the family. He had not worked in the company since he was a teenager, and did not have a technical background. The son began challenging everything about the deal, and generally became a pain in the neck. Fortunately, he changed his mind once his father revealed that a good chunk of the proceeds was going in a trust in the son’s name. This incident always reminds us to make sure that all stakeholders are on the same page early in the process.

The deal closed about 75 days after the LOI was signed. Although the owners had a six-month transition services agreement, things went so smoothly that after six weeks, the buyer told them they could start coming in twice a week. After three months, the owners could come in once a month.

Western continued to do well, and the owners received the full amount of their earnout. The buyer has been very happy with the deal, and has grown the business nicely over the past few years.

Some of the lessons learned were:

1) Customer concentration kills: It does not matter how long they have been a customer, or how well things are going, all customers are one phone call away from vanishing.

2) Preparation helps: In this case, Western was well prepared as well as familiar with the sale process, albeit accidentally because they had been in a few failed deals before we got involved.

3) Involve stakeholders early in the process: Various stakeholders can throw a monkey wrench in the deal, and the later in the process the worse the effects can be. Not only family members, as in Western’s case, but key employees or major customers and suppliers can object to a deal. Buyers can get spooked if there are any disputes, and any delay increases the chance that a deal will not happen. Owners want to keep things confidential, but it is important to obtain the proper buy-in from key stakeholders as early in the process as possible.

Although there were a few ups and downs during this process, the business was doing well, and both the seller and buyer were motivated to get a deal completed quickly. Not all deals go as smoothly, but with some preparation, luck, and dedication to completing a deal, the chances that a deal will close can certainly improve. 

Tom Kastner is the president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. Securities transactions are conducted through StillPoint Capital LLC, Tampa, Florida, member FINRA and SIPC.

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2017

Punching Out! Case Study—Lessons on a Deal

10-19-2017

This is a story of one of our clients, a U.S. contract manufacturer that sold a few years ago. To maintain confidentiality, the names have been changed and the details slightly modified.

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Punching Out! Making the Process Easy (M&A Process Engineering)

09-06-2017

In the M&A world, there are companies that make it easy (or at least easier) and those that make it difficult. By making the process easier, sellers should see better valuations and terms, and have a smoother deal process.

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Punching Out! Bridging the Valuation Gap Between Buyer and Seller

06-13-2017

PCB acquisitions in the U.S. are down so far in the first five months of 2017, with only two announced deals (HT Global Circuits’ acquisition of Pho-Tronics in April; American Standard Circuits’ acquisition of Camtech in May); and one anonymous deal that I am aware of that has not been announced. This compares with 11 announced deals in 2016. There are a variety of reasons for the decline, but one reason could certainly be the valuation gap between buyer and seller.

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Punching Out! How to Put a Wrench in the Rumor Mill During the Sale of a Company

05-23-2017

When selling a house, the owner’s agent puts a sign in the front yard, posts info on the Web, and invites buyers over for an open house. When selling a car, we put a sign on the windshield and take out an ad with our phone number on it. However, when selling a business, some owners do not even tell their spouses.

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Punching Out! Selling a Company—Seeing it as a Triumph, Not a Defeat

04-25-2017

Somehow, there is a still a stigma that selling a company is a negative for the owner. Many people think that there must be something wrong, otherwise, they would not be selling. In reality, exiting a business should be looked at as a triumph for the owner, not a defeat.

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Punching Out! 10 Ways to Increase the Value of Your PCB/PCBA Shop

03-22-2017

I have worked with a wide range of companies in the PCB, PCBA, and other tech and electronics sectors. Through the years, I have developed some ideas on how companies can improve their valuation. Some of these ideas are simple and involve little cost, other ideas are more long-term and involve more effort or investment.

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Punching Out! When Should I Call an Investment Banker?

02-20-2017

The quick answer is ASAP. Even if you are not considering the sale of the company for 5−10 years, it is best to be educated and prepared. Give your advisor (or a few advisors) a call to discuss what can be done to get the company ready for a future sale. The worst time to call an i-banker or business broker is when you are forced to sell due to poor performance, health issues, pending bankruptcy, or dispute with a partner or manager.

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Punching Out! Types of Company Buyers in the PCB and EMS Sectors

01-09-2017

Mergers and acquisitions in the U.S. PCB sector have been in the news recently, with at least 12 deals completed over the past year, and several more in the works. In contrast, the EMS sector has been relatively quiet, but that may change now that the presidential election is over.

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Back

2016

War Stories from the Front Lines of Deal-Making

09-16-2016

Here are some war stories from my experience in working on M&A deals in the PCB, EMS, and electronics fields. The names and details have been changed to protect the innocent.

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Timing: When is the Best Time to Sell?

08-18-2016

A few of the top questions we receive relate to the timing of the sale of a business. The first is, "Is now a good time?" The second one is, "How are market conditions?" These are the top FAQs.

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The PCB Sector—What Buyers Look for and Recent Deals

07-14-2016

The past few months have seen a rash of PCB deals in North America, for a variety of reasons.

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What the Heck is Adjusted EBITDA?

06-07-2016

If you are looking to sell or buy a business, you will most likely come across the term ‘adjusted EBITDA.’ Other common terms are adjusted cash flow, owner’s discretionary earnings, earnings after add-backs, etc. What do these terms mean, and why are they important?

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The Additive Process: Tips on How to Buy a Board Shop or Assembly House

05-14-2016

One of the quickest ways to grow a business is to acquire another business. At the same time, acquiring a business can be risky, and a really bad deal may put your original business in jeopardy. Here are some tips on how to make acquisitions.

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Your Baby’s Ugly, Now Get Over it (How to Work with Buyers)

04-14-2016

Here’s a scenario: An owner has gone to market and is starting to get feedback from buyers, and shockingly, not everyone appreciates the hard work and achievements that went into the business. Buyers may not understand the business, or they may be trying to position things for a low offer. In any case, it is important to know how to work with buyers.

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Putting Together the Deal Team

03-21-2016

When preparing to sell, remember the old saying, “He who represents himself has a fool for a client.” While many owners might be tempted to go it alone, in my experience it pays to have a deal team to help prepare a company (and the owner) for a sale

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Punching Out: How to Sell Your PCB/Assembly Shop

02-04-2016

You are thinking of selling your PCB or assembly shop. Perhaps you are contemplating retirement, you have no successors, and the thought of going to the office on Monday is driving you crazy. This column is designed to help your planning efforts. Future columns will go deeper into each subject

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