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Punching Out! When Should I Call an Investment Banker?

The quick answer is ASAP. Even if you are not considering the sale of the company for 5−10 years, it is best to be educated and prepared. Give your advisor (or a few advisors) a call to discuss what can be done to get the company ready for a future sale. The worst time to call an i-banker or business broker is when you are forced to sell due to poor performance, health issues, pending bankruptcy, or dispute with a partner or manager.

Recently, we have witnessed too many PCB or PCBA shops that have closed or are under-performing, or have lost significant value over the years. Many of these shops have not invested in equipment, staff, facilities, or marketing. It can take years to fix critical issues such as customer concentration, sales and marketing, underinvestment, staff/key person risk, certifications, etc. If something happens and the business needs to be sold, or if the company is approached by a well-funded, interested and serious buyer, it is important to be properly prepared and educated about the process and valuations.

The PCB market has seen at least 12 acquisitions or mergers in the past year or so, and many of these were sponsored by well-funded private equity firms or PE-backed companies. This pace is expected to pick up in the coming months as many owners are reaching retirement age, there is still a lot of over-capacity in the industry, and buyers are looking to grow through acquisitions.

Currently, of the approximately 210 PCB manufacturers in North America, at least half are below $5 million in sales. To sell, a company needs to make it easy to be acquired.  Easy does not mean to accept a buyer’s first offer and roll over. It means to have proper financial reporting, good equipment and facility, a good staff, low customer concentration, great certifications, a realistic expectation of value, and other features that make it attractive for a buyer. Even if both parties agree on valuation and terms and are willing to do a deal, acquisitions are difficult to complete, and any obstacle or delay can put a deal in jeopardy.

In the PCBA sector, there are at least 1,000 firms in North America, so the key is how to differentiate from other sellers. We recently approached an EMS firm on behalf of a buyer, and on the surface, it seemed like a good fit. However, once we learned more about the company, it became clear that an acquisition at any price would be difficult. The firm was not growing, and while the equipment was in good shape it was old, and the facility needed a lot of improvement. There was significant customer concentration but no real sales staff or network. Even though the owner said the shop could run without him, he was spending 80 hours a week in the office. The owner was not prepared on how to answer questions about the company, such as how to grow the customer base (we often hear that “in the right hands, this company could double or triple in sales”). It was a nice business that was making a good return for the owner and allowed him a good lifestyle, but it was not a sellable business. In a sector where there are hundreds of similar businesses, it is important to make it easy to be acquired.

What is good for the preparation of the business for a sale is usually good for the business in general. Customers want to see that you have good equipment and are maintaining the facility. Good financial reporting will help the owner and managers respond quickly to issues, and help point out potential areas for improvement. Investments in staff and training will pay dividends in the future. Proper documentation can help a business get organized, and can prevent issues, fines, and lawsuits. Reducing key person risk can allow the owner to focus on what they enjoy and/or what they are good at. 

While all this preparation may seem costly and time-consuming, it is much easier than starting, growing, and running a business. The shop owner has already put in the hard work, and being prepared for a sale can produce an excellent return-on-investment. Invest a little time and give your investment banker and other advisors a call. 

Tom Kastner is the president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries.