Punching Out! Avoid Surprises During the M&A Process

No one likes surprises, especially in merger and acquisitions (M&A) deals; there are enough unknown variables to start with. As the deal progresses, tensions start to rise, so any additional variables can cause a disproportionate response. Below are some ways to avoid surprises, and how to deal with them when they come up.

The best way to avoid surprises is to prepare in advance as much as possible. An owner may think they know their business, but no one can know everything. Some sample items to focus on are:

  • Conduct presale due diligence so that close corporate, legal, and other issues are disclosed from the beginning or rectified before even starting the process
  • Run a Uniform Commercial Code (UCC) check. There may still be an outstanding lien that was never released on that drill that purchased in 1970
  • Have your attorney check customer, supplier, and other contracts to see if any need to be updated or have a change of control clauses
  • Presale quality of earnings reports are becoming more popular, so consider having a CPA firm perform this report to disclose potential accounting issues and risks for a buyer (audited financials for at least three years would be preferred)
  • Conduct an independent customer survey, which can reveal both positives and negatives with customer relationships
  • Conduct Phase II environmental testing. Many buyers will ask for this anyway, so you might as well get it out of the way. At a minimum, periodically conduct Phase I testing or have an environmental consultant conduct a review, which will show potential risks
  • Utilize IT consulting and data backup. Many buyers will be concerned about how sensitive customer and company data is handled. If internal systems are too old, it may affect a company’s value
  • If you have a landlord, their consent will most likely be needed for a buyer to take over the lease. Moving a PCB shop is nearly impossible, or at least very time-consuming and costly, so it’s important to know if the landlord will support the deal

By looking at ways to avoid surprises before they become surprises, an owner can avoid issues that should have been known. There are not many things more embarrassing than finding something out from a buyer that the owner should have been aware of.

No business is perfect; even Fortune 500 companies have issues. Disclosing negative sides of the business is important. The buyer will eventually find out, and it’s better if the seller discloses these matters in advance. Disclosing negative items shows credibility, and the seller can describe the issue in their own terms. For example, the lack of a sales team is an opportunity for a buyer to grow by investing in sales resources. Try not to overhype the business, as savvy buyers may see the hype as a way to cover up issues.

If surprises do come up during the M&A process—and they will—disclose the issues quickly and fairly, and propose solutions. Some examples might include:

  • The largest customer announces they are being acquired
  • Health issues, such as the owner or a key employee having a sudden health issue
  • Sales and/or profits drop, which is probably the most common and worst surprise. Improve forecasting by staying in touch with customers and the sales channel
  • A fire or disaster (maybe insurance will pay for new equipment?)
  • External shocks, such as a trade war or a drop in the overall market
  • Regulatory issues, such as a new regulation being announced, or one may pop up that no one had heard of previously
  • Lawsuits, employee issues, or product returns/warranty claims

Issues always come up, but experienced buyers and advisors have seen (almost) everything. As long as the issue is disclosed quickly, both parties can try to find a solution. If a buyer really likes the business, they will be open to a fair solution. That being said, surprises may increase the time and cost of a deal. Time kills all deals, so avoiding delays is important.

Of course, good surprises happen too. Unfortunately, good surprises usually do not give a seller as much of a bump in value as bad surprises deduct from value. This is because buyers are typically skeptical to begin with, and any bad surprises just seem to justify their skepticism. Good surprises include a jump in orders and sales, favorable market conditions, a government regulation that favors the company, etc.

Keep in regular touch with the other party/buyer to make sure there are no surprises on their side. If things go quiet without advance notice, there is probably an issue. Keep the other side to a schedule, and let them know in advance if you are going to be out of the office for more than a day or two.

The biggest shock in M&A deals is if there are no surprises at all. Prepare to be surprised, which will make it easier to deal with the twists and turns of the M&A process.

Tom Kastner is the president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. He is a registered representative of StillPoint Capital, LLC—a Tampa, Florida member of FINRA and SIPC—and securities transactions are conducted through it. StillPoint Capital is not affiliated with GP Ventures.  

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2018

Punching Out! Avoid Surprises During the M&A Process

11-27-2018

No one likes surprises, especially in merger and acquisitions (M&A) deals; there are enough unknown variables to start with. As the deal progresses, tensions start to rise, so any additional variables can cause a disproportionate response. Below are some ways to avoid surprises, and how to deal with them when they come up.

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Punching Out! How to Avoid Key-Person Risk

09-06-2018

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08-08-2018

One of the biggest risks in M&A is customer concentration risk. It is hard to avoid as a business owner; if a customer is giving you orders, you generally take them! The next thing you know, your customer has 90% of your sales and they own you. We see this a lot in both the PCB and contract manufacturing industries.

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02-22-2018

My firm has been approached by foreign firms several times this year and in 2017 who want to acquire PCB, PCBA, or other electronics companies in North America.

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Punching Out! Top 10 M&A Deal Killers

01-25-2018

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2017

Punching Out! Survey on State of the North American PCB M&A Market

12-29-2017

Recently, my firm surveyed about 20 PCB manufacturers in North America with an estimated greater than $10 million in revenue. Quite a few replied, and we have spoken with many others throughout the year, which gives us a good view on the state of the PCB market. If I did not contact your shop recently, it is because we already talked within the last 12 months.

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Punching Out!: PCB/PCBA M&A Top 10 FAQs

11-13-2017

We talk with owners a lot about the possible sale of their businesses. Here are the top 10 questions asked by PCB/PCBA shop owners about the process.

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Punching Out! Case Study—Lessons on a Deal

10-19-2017

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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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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

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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

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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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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

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