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Punching Out: Entrepreneurship Through Acquisition Buyers for PCB/EMS Shops

A growing trend in the U.S. is the rise of Entrepreneurship Through Acquisition (ETA) buyers for every business under the sun. Just as private equity firms have been active in a wide range of industries, ETA buyers have picked up their interest in both PCB and EMS companies.

An ETA buyer is up to three people who plan to buy one company and run it. They might use their own funds or gather funds from investors, perhaps a private equity firm or partners in a PE firm (which is sometimes called a search fund). ETA buyers often use Small Business Administration (SBA) loans to provide most of the funding. Depending on the situation, buyers may be able to put down as low as 10% of the purchase price, while supplying the rest from a combination of an SBA loan, a seller note, an earn-out, or other forms of deferred compensation.

A good deal of ETA buyers have work experience either in operations or finance and dream of owning their own business. Rather than work 9–5 for some soulless corporation, you can buy a business and determine your destiny. Many ETA buyers plan and study for years while working for a company, then quit to search for companies. Many ETA buyers start out thinking they will sell the business in the future.  While start-ups and “unicorns” make headlines, many people think that buying a “boring” baby boomer business is the best way to wealth and independence.

For smaller businesses in the $1 million to $10 million range in revenue, there are not always a lot of great options for sellers. These businesses are too small for the typical PE firm, except perhaps as an add-on. Many baby boomer owners do not properly prepare their businesses for a sale, and they may have several “deal-killer” issues, such as customer concentration, key-person risk, high valuation expectations, or old machinery. There may be strategic buyers within the industry; however, many strategic buyers of smaller competitors want to close the seller’s shop and consolidate production into the buyer’s facility. A consolidation is not usually a seller’s favorite option, because the buyer typically does not want most of the employees, and the seller is stuck with the real estate (or they have to get out of a lease). For our firm’s recent sell-side deals in the $5-10 million revenue range, ETA buyers have been some of the top bidders. 

ETA buyers are attractive to many sellers. The buyer may change things in the business, but in general, they keep the company name and employees intact. The seller may have to teach the buyer a lot about the business; however, it can be refreshing to have a young “apprentice” eager to learn.  

Is an ETA acquisition always all champagne and caviar for the buyer? Probably not, but neither is a regular job. It is too early in the trend to determine the success rate of recent ETA buyers. The SBA recently tightened up some of its rules because of the increase in default rates from 1–2.5%. Because ETA buyers use debt to make acquisitions, thit increases the company’s risk, especially if there is a downturn. Most ETA buyers have not been through a recession as business owners, so it may be difficult to make the tough decisions to keep the company going during a rough spot. Most SBA and other lenders require a personal guarantee on the loan, so a buyer is risking more than just the down payment. Buying an existing business has its risks, but it is less risky than starting a business from scratch. A good deal of ETA buyers have a background in finance or have studied acquisitions diligently, so they are careful about the debt service coverage ratio and other financial issues.

I believe we will see more ETA buyers in the PCB and EMS sectors this year and in the near future. Many baby boomer owners are ready to retire, and most small companies in these sectors do not have management teams who can take over. It is a great way for the younger generations to get into the industry and provide more energy. With government support and the trend toward re-shoring, it could be a new dawn for the PCB/EMS sectors and for U.S. manufacturing.

Tom Kastner is the president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries.  GP Ventures has offices in Chicago and Tokyo and has completed over 20 deals in the PCB and EMS sectors. Tom Kastner is a registered representative of and securities transactions are conducted through StillPoint Capital, LLC—a Tampa, Florida member of FINRA and SIPC. StillPoint Capital is not affiliated with GP Ventures.