If, like many of your baby boomer peers, you've been thinking about hanging a "gone fishing . . . for good" sign on the door, the good news is that it's a sellers market for plastics processing companies. You could make out like a bandit. But don't dither, cautions Deborah Douglas, Managing Director of the Douglas Group (St. Louis, MO), which specializes in mid-market mergers and acquisitions (M&As). As more boomers retire in the next few years and supply starts to meet demand, prices will fall.
|Deborah Douglas, Managing Director,
Also worth considering is that the strong dollar, which has been a boon for U.S. tourists traveling abroad, will be less felicitous for domestic transactions. "I can't think of any deals in the last five years that did not have international bidders," says Douglas. "As the dollar gets more expensive for them, it might have an impact and force sellers to price more modestly."
So what should you keep in mind if you are starting to imagine your future hanging by a thread of fluorocarbon fishing line? Douglas, who founded her M&A practice in 1989, has some suggestions. The most important thing, she says, is to give yourself an appropriate amount of time to plan for your sale.
"You should start the process two to three years ahead of time. It's unfortunate, but many owners don't contemplate what they need to do until they are ready to sell. If they would take the time to plan ahead, I can usually get them 25% more," says Douglas.
She also stresses that companies need a business focus in order to attract buyers. "I would say that one of the first words out of the mouths of 80% of potential buyers is 'niche.' They are looking for focused companies that they perceive to be more resistant to competition and that have better margins," says Douglas. Taking on more business is not always better, she adds, especially if the margins take a beating. What matters is your business's focus.
A common mistake that owners of midsize companies make is not fully sharing responsibilities with second-tier management. "The owners often are too protective of their primary customers, and keep that relationship to themselves. It's important in the eyes of a buyer that a strong, knowledgeable management team be in place, and that relationships with customers are deep within the organization," says Douglas.
Douglas also recommends doing an annual SWOT (strengths, weaknesses, opportunities, threats) analysis. "This is a healthy exercise for long-term planning that should be done each year," says Douglas, but, of course, many owners neglect it. "Buyers look at this, and will pay strong attention to management's prognosis for future growth," notes Douglas.
As company owners get older, they also tend to become more reluctant to invest in new technologies. Bad move, says Douglas. "We deal with a lot of injection molders, and see this quite often." If you neglect investing in technology over, say, five to 10 years, potential buyers will notice and that will have a negative effect on your pricing and, perhaps, sale.
Speaking of pricing, we asked Douglas what sort of windfall the owner of a mid-level plastics processing company might expect under current economic conditions. That can swing from a high of seven to 10 times company earnings before interest, taxes, depreciation and amortization (EBITDA) to three to five times EBITDA for smaller or less profitable companies. "The average plastics processor likely will achieve an average price between five and six times EBITDA," says Douglas.
Hot properties right now, adds Douglas, are processors serving medical device manufacturers, which "seem to grow with amazing long-term consistency," and manufacturers of pet equipment. "Pet products seem to have a special recession resistance, and are one of the highest growth market segments in the country," says Douglas.
End-user segments with a strong and consistent growth pattern will lift the boats of suppliers, and make them desirable in the acquisition marketplace. Beyond specific end markets, processors that have mastered sophisticated technologies or that work with unusual materials can all add value, says Douglas. "Decorating or finish capabilities can make the processor invaluable to customers and, hence, also add value," she says.
A common misperception among sellers, says Douglas, is the assumption that they know who the buyers are going to be. "They usually think of their head-to-head competitors and assume that they will be the premium payers because they would so love to be rid of the competition," says Douglas. Alas, history shows it just ain't so. "The company willing to pay the premium is the off-center, slightly adjacent business. It gets more when it buys you; it's a one-plus-one-equals-three calculus," says Douglas. It pays to think sideways.
With plenty of money in the hands of private equity and strategic investors, low interest rates and a paucity of supply, the deck is stacked in favor of plastics processors looking to sell their companies. But that won't last forever. If you're thinking about calling it a day, now is the time to start planning for that cherished moment when you hang that "gone fishing" sign on the door and, umm, go forth to seize the carp.