When the owner of a plastic molding company decides it is time to sell and exit the business, there are generally two overriding questions:
- How do I maximize the value of my business?
- How can I attract an acquirer that is a great cultural fit – for my customers and my employees?
Maximizing value and attracting good buyers often go hand-in-hand. The key drivers that help you achieve these goals are probably etched in your brain already: profitability, sales growth, EBITDA margins, customer concentration, etc. Other drivers of value and investor interest include “curb appeal” (the organization and cleanliness of the facility), the degree of specialization and the existence of a strong non-shareholder management team.
But what else can impact business valuation when an owner is looking to exit? And just as important, what soft drivers help make the company attractive to a pool of larger and more sophisticated acquirers? Here are a few of the less obvious aspects of a molding business that are important to buyers and investors. Most of these can be addressed or incorporated into your enterprise with modest investment and a little advance planning.
Reviewed or Audited Financial Statements. Many smaller companies and family-owned businesses do not need and/or are not required to produce audited or reviewed financial statements on an annual basis. This may be perfectly fine when “operating” the business, but when selling your company, audited or reviewed financial statements provide more comfort to buyers and signal a higher degree of sophistication in your organization. Reviewed or audited statements provide standardization, more compliance with GAAP and lower the chances of finding accounting mistakes/irregularities during due diligence. An acquirer that is more confident in the strength and validity of the financial results is more likely to make an aggressive offer for your business.
Quality Certifications. ISO/TS certifications are common in the manufacturing sector today. However, there are still many smaller companies that, despite having excellent quality, have not pursued an official quality certification. ISO and TS certifications are very important to larger strategic acquirers because they themselves are likely ISO/TS certified and know that post-acquisition integration will be easier and less costly if the target has the same credentials. Furthermore, if your business is focused in one particular industry, obtaining and maintaining the appropriate certification (TS-16949 for automotive, ISO-13485 for healthcare, AS9100 for aerospace, ISO-9001 for general industrial, etc.) is a signal that your company is a serious player.
Detailed and Defensible Forecasts. Companies with a robust pipeline of measurable new business are universally more attractive to acquirers and investors of all shapes and sizes. Many custom injection molders “guestimate” future revenues and profits based on historical trends. This type of forecast is better than nothing, but definitely not optimal. The most credible forecasts are those in which the company has gathered monthly volume projections (ideally from the customer) for each active part number. Program launch dates, ramp-up periods, seasonality and end-of-life data should be built into the model. Companies that can forecast on a part number (or SKU) basis AND provide the supportive data are more attractive to sophisticated buyers and almost always command higher valuations.
Raw Material Pass-Throughs. Acquirers are always interested in customer contracts/agreements and the ability of the molder to pass-on any resin price increases. The more a company and its profit margins are insulated from raw material price fluctuations, the more comfortable a buyer or investor will be with future earnings. This translates to a lower risk profile and higher valuations. There are various tools that injection molding companies use that can mitigate raw material pricing risk. Some of these include customer negotiated raw material contracts, supply agreements with periodic price adjustments based on raw material price movement, financial hedging (commodity resin), customer consigned raw material, and several others. The more your company can insulate itself and its profits from resin price increases—even if this means sacrificing excess profits during deflationary periods—the more investor interest it will generate and your valuation multiple will likely increase.
Owner Succession/Transition. Management transitions can be extremely taxing on any company, especially a company that has just undergone a change-in-control transaction. So buyers and investors of all types strongly prefer companies that are likely to have stable management through an acquisition and long-term transition. If you are the owner and actively involved with your company’s day-to-day operations, it will be beneficial if you have a succession plan in place involving the next generation of management. This is still the case even if you plan on staying several years following a deal; acquirers understand that owner intentions/plans can change soon after a deal is completed and harbor concern over the loss of “know-how” if/when key managers leave. So to the extent buyers and investors are comfortable that the company’s key human capital will remain intact after an acquisition, the more they will be excited about the investment and the more they should be willing to pay for the business.
Crisp Explanation of Unusual Events. All businesses have exceptions, adjustments, one-time occurrences and temporary setbacks. For example, if your business had a precipitous drop in revenue two years ago, every acquirer will want to understand the cause and the details surrounding the event. Was it a one-time occurrence or will the issue appear again in the future? Was it the loss of a customer or just a temporary gap in orders? Buyers will want to assess the risk of past anomalies impacting the future results of the company. Being proactive and prepared to clearly explain unusual circumstances can mean the difference between a nervous and overly cautious buyer and an acquirer that is confident in the business and impressed with management’s understanding of past challenges or events.
In conclusion, there is a lot for molding company owners to keep in mind as they plan their exit. No company is perfect and no M&A transaction is perfect. But there are a lot of small and inexpensive tweaks that can make a big difference in valuation. And some of these tweaks could be the difference between finding and attracting an okay buyer, a good buyer or the PERFECT buyer.
As you consider your options and formulate your own exit strategy, keep in mind that MBS offers exit planning consulting for molders and other plastics processing businesses. We leverage our experience as former injection molding company owner/operators…and also use the knowledge and experience gained during our 76 (and counting) successful plastics industry M&A transactions.
Please call or email Jonathan Soucy to discuss your long-term or short-term exit strategy!
by Jonathan Soucy