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Punching Out! Case Study—Lessons on a Deal

This is a story of one of our clients, a U.S. contract manufacturer that sold a few years ago. To maintain confidentiality, the names have been changed and the details slightly modified.

The two owners of Western CM founded the company in the ‘80s, and after 30+ years they were ready to retire. Revenues had climbed to $15 million, and EBITDA was around 10%. Customers were in the military, wireless, industrial, and commercial sectors. They were contacted directly by several buyers, and went down the road with a few, but each deal fizzled out. The owners then contacted our firm to take them to market. Because the company was prepared, we quickly developed the confidential materials.

Unfortunately, as soon as we got to market, Western’s largest customer (30% of revenues) decided to move half of their production overseas. We mutually decided to put the sale on the back-burner.

Western had already started an overseas sales group, and as a result of losing that large customer, they doubled their efforts in this area. After about a year, the domestic business was up, and the overseas business was making great strides. Since the business was doing well, we updated the materials and went back to market.

This time around, Western’s sales and profits were doing well, and we received a wide range of offers. The initial offers ranged from 3–6x EBITDA, and from 50% cash to 90% cash at closing. Buyers ranged from private equity firms, to strategic buyers, to wealthy individuals. In the end, we signed a Letter of Intent with a strategic buyer at 4.5x cash with 1x EBITDA in an earnout that was based on sales goals. The deal was on a cash-free, debt-free basis (sellers keep cash, pay off debt), net working capital was included in the deal, and it was structured as a sale of assets. The owners had a 6-month services agreement after closing.

The buyer was interested in Western because of their location, key capabilities such as mil/aero, and their overseas experience. Many buyers in the PCBA sector are more interested in consolidating companies into the buyer’s facility, but in this case the buyer wanted to maintain the business as a going concern (which was important to the sellers).

Due diligence mostly went fine, although we found out that the company’s trademarks were in the owners’ wives’ names. No one could remember why they did that 30 years before, but we were able to handle that issue without any delay in the process.

However, about a few weeks before the scheduled closing, the son of one of the owners decided that he wanted to keep the company in the family. He had not worked in the company since he was a teenager, and did not have a technical background. The son began challenging everything about the deal, and generally became a pain in the neck. Fortunately, he changed his mind once his father revealed that a good chunk of the proceeds was going in a trust in the son’s name. This incident always reminds us to make sure that all stakeholders are on the same page early in the process.

The deal closed about 75 days after the LOI was signed. Although the owners had a six-month transition services agreement, things went so smoothly that after six weeks, the buyer told them they could start coming in twice a week. After three months, the owners could come in once a month.

Western continued to do well, and the owners received the full amount of their earnout. The buyer has been very happy with the deal, and has grown the business nicely over the past few years.

Some of the lessons learned were:

1) Customer concentration kills: It does not matter how long they have been a customer, or how well things are going, all customers are one phone call away from vanishing.

2) Preparation helps: In this case, Western was well prepared as well as familiar with the sale process, albeit accidentally because they had been in a few failed deals before we got involved.

3) Involve stakeholders early in the process: Various stakeholders can throw a monkey wrench in the deal, and the later in the process the worse the effects can be. Not only family members, as in Western’s case, but key employees or major customers and suppliers can object to a deal. Buyers can get spooked if there are any disputes, and any delay increases the chance that a deal will not happen. Owners want to keep things confidential, but it is important to obtain the proper buy-in from key stakeholders as early in the process as possible.

Although there were a few ups and downs during this process, the business was doing well, and both the seller and buyer were motivated to get a deal completed quickly. Not all deals go as smoothly, but with some preparation, luck, and dedication to completing a deal, the chances that a deal will close can certainly improve. 

Tom Kastner is the president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. Securities transactions are conducted through StillPoint Capital LLC, Tampa, Florida, member FINRA and SIPC.