The economy looks great for precision machine shop owners right now. For many, the biggest challenge is keeping up with demand. That doesn’t mean growth will be perpetual. Many owners are contemplating a sale now, when values are at record highs. Some, however, think they should keep growing the business to cash in later.
Owners should know that an equity-focused approach is best in this economy. The goal is to focus on maximizing wealth after taxes at retirement. Smaller manufacturing shops are high risk because of high concentration and low liquidity. In an increasingly consolidating industry, that’s doubly true. Your equity strategy can protect you.
So what do most owners get wrong? Many mistakenly believe that growing sales mean growing equity. But company valuations are complex, and ultimately depend on the individual factors the buyer cares about.
An Equity Strategy in a Consolidating Industry
Scale and capital are the powerful ingredients in the recipe for a successful supply chain company with good margins. You must look critically at your business, assessing financial and competitive strengths, the current financial cycle, and the route to the equity goal that is right for your company. There’s more than one way to get there.
This fragmented industry is facing massive consolidation. Roughly the bottom third of competitors are unlikely to survive. Partnerships may be necessary as advanced technologies and automation increase the pressure. New competitive technologies can give you a strong advantage. Your management team needs a strong set of skills, and the ability to scale your company up.
PE-backed regional players invest for cost efficiency and attract strong talent. If you can’t afford these investments, you can get into trouble. Simply desiring to stay in business does not necessarily mean you should.
The Role of Private Equity
PE is currently looking to precision machining. The industry is fragmented, and ripe for consolidation. This is driving higher valuations, and multiple offers even on small companies. This suggests the cycle is peaking, and that the time to sell is now, not at some imaginary date in the future when things will be even better.
Companies that hope now tot exit the industry can avoid a sale by partnering with a stronger partner or PE firm to get more funding and build strength. PE-backed firms eventually sell on a five to seven year cycle, empowering owners and managers to sell at a higher multiple down the road. This may be a better option for owners’ long-term equity strategies, especially if they’re neither well positioned to sell nor well positioned to continue growing.