Although many people in the M&A community like to talk about valuations in the form of multiples of EBITDA, revenue, annual recurring revenue, or other metrics, ascribing a value to an enterprise is much more complicated than multiplying a couple of metrics. Buyers try to estimate the future earnings potential of businesses by taking into consideration all aspects of the company, including product differentiation, customer base, end market trends, the strength of the management team, and numerous other aspects of the organization and the markets in which it participates. Historically, particularly for traditional manufacturing businesses with steady growth, recent sales and earnings have been viewed as the easiest and most accurate way to predict future results.
However, because companies have been operating for several years in a unique environment caused by the COVID-19 pandemic, buyers are more skeptical that recent performance is an indicator of what is to come. Across all industries, buyers are scrutinizing all forecasts much more granularly and not just those with “hockey stick growth,” in order to get comfortable that historical results over the past few years were not temporary highlights caused by unique market conditions. Instead of accepting forecasts with moderate (~5 percent) growth and consistent margins, buyers are diving deeper to understand forecasting assumptions and stress test them against worst-case scenarios.
Because of this, potential sellers must ensure that they have spent adequate time forecasting and have used data-driven assumptions and market analysis to drive projections. During buyer due diligence, sellers and their advisers should be prepared to address and explain their methodology and confidently address buyer questions and concerns. Doing so will drive buyer interest and valuation multiples.
While the primary impetus for this change in buyer perspective stems largely from the pandemic and other macroeconomic factors like interest rate increases and complex geopolitical conditions, we expect that this aspect of buyer assessment will become a regular step in the deal process for the foreseeable future.
M&A Market Activity
U.S. deal volume declined by approximately 13 percent in March 2024 as compared to the prior month, and YTD volume decreased by approximately 22 percent as compared to the prior year. That said, transaction value remains near historical highs, as private equity firms and strategic acquirers have significant liquidity and are willing to pay premiums for high-quality assets.
The Columbus M&A market saw a slight increase of deal volume in March of 2024 as compared to the prior month, but continued the trend of lagging behind prior year activity. March 2024, however, saw several noteworthy transactions completed, by both strategic acquirers and private equity firms. Zipline Logistics, Greif Inc., Arvo Tech, Verdantas, and Omnia Exterior Solutions all completed strategic acquisitions, while companies like Forklift Training Systems, Asymmetric Technologies, Before You Apply Inc., BYBE Inc., and Johnson Welded Products saw successful exits during the period.
Deal of the Month
The deal of the month for March 2024 in Columbus is Spartan Tool Supply’s sale to Foundation Investment Partners. For over 45 years, Spartan Tool Supply has served as a supplier of high-quality commercial tools and equipment to businesses across various industries. Under the ownership of Foundation Investment Partners, Spartan Tool Supply will continue to operate autonomously, augmenting its existing workforce with industry veteran Derek Elbaor as CEO. The acquisition will provide Spartan with access to new resources and expertise to expand the team, enter new markets and build upon the company’s success.
“We are thrilled to welcome Spartan Tool Supply into the Foundation Investment Partners family,” said David Wood, Managing Member of Foundation Investment Partners. “Spartan’s reputation for providing leading industrial brands and stocking unique, hard-to-find consumables and accessories align perfectly with our dedication to delivering exceptional value to our customers.”
Daniel Bowman is a Director with MelCap Partners, LLC, a middle-market investment banking advisory firm. For more information on MelCap Partners, please visit www.melcap.com or email [email protected].
