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Mergers and acquisitions for small job shops, suppliers, and manufacturers
sherwood
onmanagement
Mergers and Acquisitionsfor Small Job Shops,Suppliers,and Manufacturers
A
t one extreme of our economic spectrum is the company struggling to stay in business as a result of being pummeled by the low selling prices of foreign competition. At the other extreme is the company striving to grow rapidly to prevent competition from catching up. And somewhere in between is the family business that has to grow to provide jobs for an expanding family. Whatever the motivation, merger offers an acceptable low-cash approach to growth and survival. But be advised: a merger is like a marriage and can be fraught with the same problems of personality and culture conflicts. A merger maker must be able to tap dance through these problems and know the financial mechanics in order to pull off a successful venture. If the elite business and law schools can teach using the case history method, I can be justified in using this method to teach mergers and acquisitions. In this presentation, an advantage is that the cases to be presented will be exclusively those evolved from my personal experiences as any or all of the following: consultant, buyer, negotiator, mediator, or finder. The cases concern job shops, suppliers, and manufacturers' captive facilities that are considered small in the surface finishing business. To retain confidentiality and protect the innocent (and the guilty), the names have been withheld and numbers have been changed. www.metalfinishing.com
CASE 1. JOB SHOP BACKGROUND. This case examines a job shop doing commercial decorative chrome plating with 20 employees, a volume of $800k/year, and operating losses. A family trust owned the 70,000 ft 2 property that was leased to the business. The property was larger than required for the plating operation, allowing the owners to lease out the unused part of the building. Long-term prospects for the business were poor due to 1) competition from foreign sources, specifically China, and 2) obsolete, neglected equipment. In addition, the government regulatory agencies were causing significant financial impact due to penalties and compliance COSTS. ACTION. The general manager and consultant were instructed to determine whether to shut down the business or sell it. The consultant's subsequent analysis showed a cost of $180k to shut down, sell the equipment, and clean up in compliance with the regulatory agencies' strict environmental requirements. Believing this cost to be excessive, private solicitations were then made to sell or merge the business. SOLUTION. After many months, a job shop was found in the area that did decorative chrome plating, and many other commercial finishes, in a leased facility that was not large enough. The business was sold for $90k with the provision that the buyers would lease a 60 ft 2 area for a period of 10 years. The lease cost was to be slightly less
than the prevailing rate. The principal negotiator in the transaction was the seller's consultant. The buyer moved their equipment into the building, saving the sellers the cost of shut down and clean up. Sales volume for the buyers increased, with overhead only slightly increased by a higher rental cost. The Family Trust (sellers) then had significant income from the property in contrast to continuing losses from the business and inadequate income from the property. CASE 2. DISTRIBUTOR
BACKGROUND. A very reputable, long-established distributor of proprietary and commodity chemicals, equipment, and supplies to the surface finishing industry encountered serious cash flow problems as a result of 1) overexpansion into a foreign country and 2) credit limitations and competition from its suppliers of proprietary chemicals. Combined domestic and foreign sales volume was $8 million/year, with continuing and increasing operating losses. The long-term outlook was not good, and the proprietor owned the business property. This was a family business, 1 with several family members employed. The owner, although close to retirement age at 62, wished to remain active in the business. ACTION. The owner requested that the company's consultant find a merger or buyer for the company that would enable the business to continue with the owner remaining March 20081 metalfinishing 155
sherwoodonmanagement as chief executive. This CEO's compensation package would include a basic salary, plus a percentage of profits above an established benchmark. Private solicitations were made to competitors and manufacturers of proprietary and commodity chemicals. In addition, responses were made to business broker and consultant company inquiries, which were previously of no interest. SOLUTION. A large, $80 million/year commodity chemical distributor to many industries was found and expressed interest in expanding to include proprietary chemicals and the foreign subsidiary. The purchase price, in cash, was $2.5 million, in three annual payments. The property was to be leased from the owner. A five-year compensation package for the owner was at 25% above his prior income, plus a percentage of the profits above the profit level at initiation of contract. No contractual employment agreements were made with the family-member employees or any of the other employees. CASE 3. THE JOB SHOP A N D THE MANUFACTURER, OR DAVID A N D GOLIATH
BACKGROUND. A Fortune 500 company (Goliath)
established a captive job plating shop in one of its manufacturing facilities. This was an outgrowth of its patented plating process, which it had developed and used to plate the interior of large tanks in a facility specifically dedicated to this project. The company eventually decided to license the process and sell its job shop because it was not producing a high enough profit to justify the plant space and effort. ACTION. David, the job plating shop, was competing with their captive job shop in their geographical area. Goliath was selling their work at a drastically lower price than David. Fortunately, he was informed that his company had an opportunity to buy out this monster competitor. The manufacturer's selling package included a price of $150k based on the market price of the equipment, plus the purchase of a license for $50k, plus an annual royalty fee based on usage. SOLUTION. In order to meet the cash requirements, the job shop had to sell 40% of its company stock to the public. David completed the deal and subsequently moved equipment from both companies into a new building that housed the merged company. He found out during the transition that Goliath had no accurate pricing schedule or follow-up on costs. After getting rid of Goliath's unprofitable jobs, David was back on track, utilizing good pricing practices without having to meet the former competitor's prices. The lesson learned was that "just because they are big doesn't mean they are good." Mergers and acquisitions can be a mechanism to aid in survival, get rid of competition, and grow your company. The references to follow can assist you in learning about the process. NOTES
1. Sherwood BJ. Family business or family business? Which is it? What should it be? Metal Finishing, 2007 (Dec.);105(12):50-1. 2. Sherwood BJ. Sage advice for the family business owner/manager. Metal Finishing 2007 (Jan.);105(1):51-3. 3. Sherwood BJ. How to merge, sell, or close your surface finishing company. Metal Finishing 2006 gan.);104(1):53-4.
BIO
Bert J. Sherwood, M.S. in Ch.E., is president of Sherwood Business Management Corp., a consultingfirm providing business and technical advice to surfacefinishing and manufacturing companies. He can be reached at sherwoodbj@aoLcom. Circle 033 on reader information card or go to www.metalfinishing.com/advertisers
March 2008 1meta|finishing I 56
www.meta[finishing.com
onmanagement
Mergers and Acquisitionsfor Small Job Shops,Suppliers,and Manufacturers
A
t one extreme of our economic spectrum is the company struggling to stay in business as a result of being pummeled by the low selling prices of foreign competition. At the other extreme is the company striving to grow rapidly to prevent competition from catching up. And somewhere in between is the family business that has to grow to provide jobs for an expanding family. Whatever the motivation, merger offers an acceptable low-cash approach to growth and survival. But be advised: a merger is like a marriage and can be fraught with the same problems of personality and culture conflicts. A merger maker must be able to tap dance through these problems and know the financial mechanics in order to pull off a successful venture. If the elite business and law schools can teach using the case history method, I can be justified in using this method to teach mergers and acquisitions. In this presentation, an advantage is that the cases to be presented will be exclusively those evolved from my personal experiences as any or all of the following: consultant, buyer, negotiator, mediator, or finder. The cases concern job shops, suppliers, and manufacturers' captive facilities that are considered small in the surface finishing business. To retain confidentiality and protect the innocent (and the guilty), the names have been withheld and numbers have been changed. www.metalfinishing.com
CASE 1. JOB SHOP BACKGROUND. This case examines a job shop doing commercial decorative chrome plating with 20 employees, a volume of $800k/year, and operating losses. A family trust owned the 70,000 ft 2 property that was leased to the business. The property was larger than required for the plating operation, allowing the owners to lease out the unused part of the building. Long-term prospects for the business were poor due to 1) competition from foreign sources, specifically China, and 2) obsolete, neglected equipment. In addition, the government regulatory agencies were causing significant financial impact due to penalties and compliance COSTS. ACTION. The general manager and consultant were instructed to determine whether to shut down the business or sell it. The consultant's subsequent analysis showed a cost of $180k to shut down, sell the equipment, and clean up in compliance with the regulatory agencies' strict environmental requirements. Believing this cost to be excessive, private solicitations were then made to sell or merge the business. SOLUTION. After many months, a job shop was found in the area that did decorative chrome plating, and many other commercial finishes, in a leased facility that was not large enough. The business was sold for $90k with the provision that the buyers would lease a 60 ft 2 area for a period of 10 years. The lease cost was to be slightly less
than the prevailing rate. The principal negotiator in the transaction was the seller's consultant. The buyer moved their equipment into the building, saving the sellers the cost of shut down and clean up. Sales volume for the buyers increased, with overhead only slightly increased by a higher rental cost. The Family Trust (sellers) then had significant income from the property in contrast to continuing losses from the business and inadequate income from the property. CASE 2. DISTRIBUTOR
BACKGROUND. A very reputable, long-established distributor of proprietary and commodity chemicals, equipment, and supplies to the surface finishing industry encountered serious cash flow problems as a result of 1) overexpansion into a foreign country and 2) credit limitations and competition from its suppliers of proprietary chemicals. Combined domestic and foreign sales volume was $8 million/year, with continuing and increasing operating losses. The long-term outlook was not good, and the proprietor owned the business property. This was a family business, 1 with several family members employed. The owner, although close to retirement age at 62, wished to remain active in the business. ACTION. The owner requested that the company's consultant find a merger or buyer for the company that would enable the business to continue with the owner remaining March 20081 metalfinishing 155
sherwoodonmanagement as chief executive. This CEO's compensation package would include a basic salary, plus a percentage of profits above an established benchmark. Private solicitations were made to competitors and manufacturers of proprietary and commodity chemicals. In addition, responses were made to business broker and consultant company inquiries, which were previously of no interest. SOLUTION. A large, $80 million/year commodity chemical distributor to many industries was found and expressed interest in expanding to include proprietary chemicals and the foreign subsidiary. The purchase price, in cash, was $2.5 million, in three annual payments. The property was to be leased from the owner. A five-year compensation package for the owner was at 25% above his prior income, plus a percentage of the profits above the profit level at initiation of contract. No contractual employment agreements were made with the family-member employees or any of the other employees. CASE 3. THE JOB SHOP A N D THE MANUFACTURER, OR DAVID A N D GOLIATH
BACKGROUND. A Fortune 500 company (Goliath)
established a captive job plating shop in one of its manufacturing facilities. This was an outgrowth of its patented plating process, which it had developed and used to plate the interior of large tanks in a facility specifically dedicated to this project. The company eventually decided to license the process and sell its job shop because it was not producing a high enough profit to justify the plant space and effort. ACTION. David, the job plating shop, was competing with their captive job shop in their geographical area. Goliath was selling their work at a drastically lower price than David. Fortunately, he was informed that his company had an opportunity to buy out this monster competitor. The manufacturer's selling package included a price of $150k based on the market price of the equipment, plus the purchase of a license for $50k, plus an annual royalty fee based on usage. SOLUTION. In order to meet the cash requirements, the job shop had to sell 40% of its company stock to the public. David completed the deal and subsequently moved equipment from both companies into a new building that housed the merged company. He found out during the transition that Goliath had no accurate pricing schedule or follow-up on costs. After getting rid of Goliath's unprofitable jobs, David was back on track, utilizing good pricing practices without having to meet the former competitor's prices. The lesson learned was that "just because they are big doesn't mean they are good." Mergers and acquisitions can be a mechanism to aid in survival, get rid of competition, and grow your company. The references to follow can assist you in learning about the process. NOTES
1. Sherwood BJ. Family business or family business? Which is it? What should it be? Metal Finishing, 2007 (Dec.);105(12):50-1. 2. Sherwood BJ. Sage advice for the family business owner/manager. Metal Finishing 2007 (Jan.);105(1):51-3. 3. Sherwood BJ. How to merge, sell, or close your surface finishing company. Metal Finishing 2006 gan.);104(1):53-4.
BIO
Bert J. Sherwood, M.S. in Ch.E., is president of Sherwood Business Management Corp., a consultingfirm providing business and technical advice to surfacefinishing and manufacturing companies. He can be reached at sherwoodbj@aoLcom. Circle 033 on reader information card or go to www.metalfinishing.com/advertisers
March 2008 1meta|finishing I 56
www.meta[finishing.com