2024 Quarterly Analysis

The market in brief

Last year proved volatile for mergers and acquisitions. A post-pandemic slowdown in deal volumes and the rising cost of debt changed the dynamics for companies headed to market for capital formation transactions or buy-outs.

The news is not altogether bleak. Investor interest is holding strong. Private equity firms alone are sitting on nearly $900 billion in dry powder, which they are eager to put to good use. Given economic uncertainty and global unrest, however, many investors have remained cautious in the types of deals they pursue.

We’re witnessing an interesting result in the deals we’ve been negotiating, as well as in our regular surveys of and conversations with hundreds of institutional investors: a flight to quality.

Competition for the most attractive mid-market companies is keen, driving up multiples for best-in-class businesses. Factors such as larger size, above-average financials, and a proven management team are enhancing multiples and deal certainty. Valuations for top- and bottom-quartile deals are stretching further apart.

What does this mean for manufacturers?

Strengths to leverage

Manufacturing value drivers currently catching investors’ attention include:

• Revenue Visibility: The better foresight into monthly, quarterly, and annual revenues, the higher investors’ confidence. Even if your business model is not conducive to long-term customer contracts, by tracking bookings, backlog, and pipeline, along with the associated cash conversion cycles, you can enhance company valuation.
• Growth Investments: Most buyers will steer clear of manufacturing enterprises with tired processes and equipment. Investments in technologies that enhance productivity, efficiency, and operational performance, on the other hand, will attract interest.

Cause to pause?

Unfortunately, certain weaknesses are more likely to worry investors in the current environment. Be on the lookout for:

• Customer Concentration: Tough markets often increase the chances of customer churn, meaning investors put even higher priority on customer diversity. Rules of thumb: if a single top customer comprises more than one-quarter of revenues or the top five customers represent over half, buyers may become wary.
• Product Recalls and Warranty Issues: These problems represent core threats to the brand. If customers are concerned about your product quality and reliability, investors will be, too. In this uncertain environment, most buyers will not want to engage.

No company is perfect. A manufacturing company with EBITDA of $3 million or more and generally good showing on the above factors—as well as a total addressable market that allows room for growth—could find today’s market ripe for a prime valuation.

Not checking enough boxes? The good news is that focusing on these fundamentals makes sense, even if you are years away from a potential transaction.

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About the Author

Peter Bessone is a Vice President of Class VI Partners. Over the past six years, he has helped mid-market manufacturers secure over $300 million in capital. His experience spans manufacturing sub-categories such as food and beverage, chemicals, consumer, environmental, defense, and durable medical equipment.