Prospective sellers should carefully consider what they expect from their buyer of choice, particularly, as Del Pero points out, because many sellers within the market speak to only one potential buyer and stop the process there. “A lot of the deals that we’ve seen in the market have been done on an unbanked basis, meaning an owner just consulted for himself or was approached one-off by a buyer and said, ‘That sounds good to me; let’s do it,’” he says.
However, that type of deal may leave significant value on the table, Del Pero cautions. On unbanked deals in the composites industry, Del Pero sees valuation multiples between seven to nine times EBITDA (earnings before interest, tax, depreciation and appreciation), which is fairly good compared to some other industries. (Del Pero explains EBITDA as “effectively, operating cash flow.” So, if a company is making $10 million in EBITDA per year and it sells for eight times, then it sells for $80 million.) But for banked deals, where an investment banker is involved in the process, valuations in the composites industry may range from nine to 11 times EBITDA – sometimes higher.
“If you do it the right way, you can tell the story the way you want to tell it,” Del Pero explains. “You can stage the information in a way that is strategically beneficial. But most importantly, you’re able to create what we call a ‘competitive auction process.’” In such a scenario, your company is attractive to multiple potential buyers.
Another consideration is the buyer’s intent after the acquisition. “Do you want a strategic buyer who will invest in the company or a financial sponsor who may want to sell the company in the short term?” Rathbun asks. “Our best transactions have resulted from developing a relationship early with the owners and management team and negotiating a transaction in an exclusive process that meets the goals of both parties.”
Del Pero encourages companies to thoughtfully consider several questions in the search for the right steward for their business: “Do you know what you’re really getting? Do you know what the market will bear? Do you know that you’re getting not only the best price for your company, but the best terms and conditions?” The answers to these questions should help direct sellers to the right buyer.
Integrating Corporate Cultures
Private equity firm AE Industrial Partners (AEI) formed Applied Composites through its acquisitions of AC&A in 2016, Applied Composite Engineering and Applied Composite Structures (formerly EnCore Composite Structures) in 2017, and San Diego Composites (SDC) earlier this year. From that experience, Kirk Konert, principal with AEI, can say, “Every acquisition is a little different.”