Forecasting 2017 Industrial Distribution M&A And Mistakes To Avoid

Following his 2016 recap of notable industrial distribution M&A activity, Burke Burkhardt discusses the key factors that will determine the amount of activity in 2017, as well as tips for what not to do when being acquired.

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This article is the follow-up to C.A. "Burke" Burkhardt's Monday piece, "2016: Another Active Year For Industrial Distribution M&A"

We at HT Capital Advisors believe that 2017 will follow 2015 and 2016 as another active year for industrial distribution mergers and acquisitions. A major driving force will continue to be the desire and need of potential buyers — both strategic and private equity backed platforms — to make acquisitions to achieve their growth and profitability objectives through geographic footprint expansion and product line and services enhancement and diversification.

Most of the large strategic buyers have strong balance sheets and substantial cash resources and common stock equity to use to pay for acquisitions, and while interest rates may increase in 2017, bank financing will be available. Private equity firms are estimated to have close to $1 trillion available to put to work. As indicated by some of the transactions mentioned above they have had success with and are attracted to industrial distribution. Many of them contact us regularly seeking add-on acquisitions for their existing platforms or seeking acquisitions to form a new platform.

We have talked recently to the owners of many industrial distribution companies, and several of them are thinking about exploring the sale of their businesses in 2017. Most are confident that the growth prospects for their companies will be good in 2017. While there is a lot of uncertainty about the implementation and timing of some of the proposed Trump Administration policies — including increased spending on infrastructure, a decrease in the corporate tax rate and less regulations — many business owners are cautiously optimistic that these policies could favorably affect the growth and profitability of their companies.

Timing is often everything in the world of mergers and acquisitions. Assuming that a company has been positioned for sale and that an owner is emotionally prepared to sell, the ideal time to explore a sale transaction is when growth prospects for the company are good and there are multiple potential buyers. With both strategic and private equity buyers actively on the acquisition trail, we believe that the merger/acquisition market in 2017 will continue to be a sellers’ market in which independent industrial distribution company owners will have an open window of opportunity to sell their companies at attractive valuations while achieving their other objectives.

Based on our experience, the following are four major mistakes a company owner should avoid to have a smooth and successful sale transaction:

  1. NOT HAVING REALISITIC PRICE EXPECTIONS — Having unrealistically high price expectations scares off potential buyers and is a waste of time for everyone. When preparing to sell, an owner would be wise to obtain a professional valuation. To be sure we are in agreement on an acceptable sale price, HT Capital provides potential clients with a preliminary range of value before executing an engagement agreement.
  2. NOT BEING UPRONT ABOUT A MAJOR PROBLEM — Problems such as loss of a vendor, a major A/R write-off, the existence of obsolete inventory or a tax issue should be disclosed to the financial advisor who will deal with it appropriately. If a potential buyer finds such problems upon due diligence it could kill the proposed transaction.
  3. OVERSTATING SALES AND EARNINGS PROJECTIONS — If a potential buyer determines that projections are unrealistic, a red flag will go up and the buyer may walk away.
  4. TALKING TO JUST ONE POTENTIAL BUYER — Generally the most effective way to enhance the sale price and achieve other objectives is to get competition going among two or more parties.  With the help of his financial advisor an owner should go beyond what he thinks are the most likely buyers in his industry and develop a list of other potential buyers.
C.A. 'Burke' Burkhardt, Senior Managing Director of HT Capital Advisors, LLCC.A. "Burke" Burkhardt, Senior Managing Director of HT Capital Advisors, LLC

C. A. “Burke” Burkhardt is Senior Managing Director of HT Capital Advisors, LLC, a New York-based private investment bank founded over 60 years ago which has a team focused on industrial distribution. He can be reached at (212) 759-9080 or by e-mail at cburkhardt@htcapital.com

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