Potential sellers of businesses typically cultivate and then highlight their business’s classic strengths: strong profitability, solid growth, proprietary products, diverse customer bases, seasoned management teams, etc. Most buyers of businesses seek out, and often require, these attributes in their acquisitions. Investment bankers are experienced at presenting clients’ strengths to a wide array of potential financial and strategic buyers. Today’s market usually rewards these sellers with outstanding multiples of EBITDA as motivated buyers bid against each other.
Many times, potential sellers whose companies do not possess these classic strengths conclude that their businesses are not saleable, certainly not at attractive prices. But this is not always the case. Many times, a business’s perceived weakness can actually be its strength. Examples from three sale transactions show how my team and I converted sellers’ customer concentration, an otherwise critical weakness, into a strength.
- Project Detroit. This Michigan client produced precision metal cutting machinery. The only problem was that over 80 percent of their sales were to one automotive customer. However, we found a large machine tool company that was selling to virtually everybody in the Motor City … except Project Detroit’s key customer. The fact that our client had established itself within that key customer was a major selling point. After making the acquisition, that key customer totaled 7 percent of the buyer’s customer base, a solid but manageable position.
- Project Tonka. This client manufactured a specialized component used in diesel engines. But one customer constituted 60 percent of total sales. Financial sponsors red-flagged this weakness and would not pay full value. But we found a much larger company making the same type of product that needed access to Project Tonka’s key customer. The sale was made because the very concentration that concerned most other buyers attracted the ultimate buyer to make the acquisition.
- Project Kilowatt. This client manufactured specialized electrical equipment critical to computer infrastructure. Unfortunately, they were doing 75 percent of their business with one customer and were at the limits of their manufacturing capacity — two serious weaknesses. After a careful search, we identified a strategic buyer that wanted to get into Project Kilowatt’s key customer and had redundant available plants looking for products to fill them. So, Project Kilowatt’s weaknesses were not weaknesses at all to this buyer. The rest is history — very successful history.
These examples illustrate how three businesses’ weaknesses — customer concentration — were actually strengths to the right strategic buyers. We had a task more specialized than enumerating our clients’ classic strengths and then showing the memorandum to 100+ prospective buyers. Our creative thinking uncovered the right buyers and helped them see each enterprise’s hidden value.
We encourage sellers of businesses and their advisers to likewise think out of the box to convert their weaknesses into strengths.
Mark A. Filippell is Managing director at Citizens Capital Markets
