When Grand Rapids-based Multi-Automatic Tool and Supply Co. started searching for prospective acquisitions several years ago, the move came as a reaction to many of the company’s customers buying directly from small shops.
Convinced that he needed to diversify his business in order to compete, President James Byl went looking for opportunities, but it took a few years for the pieces to fall into place and find the right target.
“I began to look three years ago, but the companies that I saw at the time just didn’t seem to be the right fit,” Byl told MiBiz. “Five, six, seven years ago, coming out of the recession, I think I needed a few years to rebuild as well. Now, banks are willing to lend and it seems like a good time.”
In July, Multi-Automatic, a minority-owned wholesale distributor of machine replacement parts, functional attachments, custom work holding products and cutting tools, acquired CNC manufacturer Belding Tool and Machine. What attracted Byl to the deal was that Belding Tool posted 20 percent year-over-year growth for the past three years.
“I was looking for a company that had good management and was profitable,” he said. “I had hoped for more assets, but the growth and the cash flow with this company was just very good.”
Most importantly, the company will complement his existing business, help it to diversify and provide a more competitive edge on custom parts, he added.
The Multi-Automatic/Belding deal comes as data show M&A slipping below last year’s record-breaking sales, even though transaction values could still put 2019 on the path to historic highs.
Nationally, 3,000 business transactions closed in the second quarter of 2019, according to a recent report from BizBuySell.com Inc., which aggregates deal data reported by business brokers. The findings represent a 9.6-percent dip from the same time last year, although the second quarter of 2019 still ranks among the most active quarters in the last decade.
Last year was the most active “business-for-sale market” since BizBuySell started tracking data in 2007, and the first half of 2019 has put this year on pace to become the second most active year.
“The economy has been good, the Boomers are looking to transition and they’re taking advantage of low interest rates and strong profits to maximize their value,” said Max Friar, managing partner at Calder Capital LLC, a small business broker in Grand Rapids.
Questions surrounding the effect of tariffs between the U.S. and China and the potential for additional international tariffs to be implemented may be at least partially to blame for the slowdown, especially among manufacturers, according to the data.
In a BizBuySell poll of business owners, 43 percent reported they are facing rising costs due to tariffs on Chinese goods. However, Friar told MiBiz he has not seen trade and tariffs affect the local deal-making market.
“Obviously, people might be concerned about the election and there’s concern about the trade war, but I haven’t heard a lot of local chatter about it,” he said. “Local business owners don’t seem to bring it up as an issue.”
Businesses being brought to market usually have had slight, steady growth over the past few years, but uncertainty may be affecting various sectors of the market differently.
Overall, the opportunities to buy a successful manufacturing or distribution business are “the hottest tickets” in the region, according to Friar. However, companies in the tool and die industry — a business hard hit by tariffs on steel and aluminum — are more difficult sells.
“I’ve got a feeling that buyers are getting a little bit more cautious and scrutinous,” Friar said. “The top reasons that businesses don’t sell are because price expectations are way outside of reality or a business is declining year over year. Buyers typically are very cautious in that type of situation because they don’t know why and they don’t know how to turn it around.”
In manufacturing, average deal size is still growing, but just slightly — around 1 percent since the start of 2019, according to recent data from PricewaterhouseCoopers (PwC). The sustained growth is driven primarily by “megadeals.” The top three deals in the current quarter accounted for $12.2 billion of deal value, or 45 percent of total disclosed deal value.
“2019 is shaping up to be the best year for megadeals since 2014 in the industrial manufacturing sector,” Paul Elie, US industrial manufacturing deals leader at PwC, said in a statement.
Total deal volume increased slightly to 562 deals in the second quarter of 2019, up 3 percent from 543 deals in the first quarter, according to the data.
Sentiment among sellers is down among “Main Street” businesses valued at less than $2 million and among lower middle market firms valued at $2 million to $50 million, according to the most recent report from the International Business Brokers Association (IBBA).
This year marks the first time four out of five sectors of the market are reporting a dip in seller market sentiment, according to Craig Everett, director of the Pepperdine Private Capital Markets Project at the Pepperdine Graziadio Business School.
The most notable decrease in sentiment is from businesses valued between $1 million and $2 million, which dropped 6 percent from the first quarter of 2018 to the first quarter of this year.
It’s a sign the market may have peaked and more people are expecting a correction from record highs in the year or two ahead, according to Everett.
“Sellers should consider selling now or waiting another few years before the market will cycle back up to current conditions,” Everett said in a statement. “To be clear, this doesn’t mean you won’t be able to sell your business over the next few years, but you probably won’t get the multiples you can get today. Any market pessimism or uncertainty will drive down value across the board.”
The IBBA report also found that the majority of small business owners fail to adequately plan for the sale of their business. Advisers indicated that 90 percent of people with a business valued less than $500,000 conducted no formal prior planning.
Lower middle-market business owners were more proactive, although roughly 48 percent also failed to make plans in advance to sell.
“There are a lot of people out there trying to sell exit planning services and transition services,” said Friar of Calder Capital. “I think the issue there is just I don’t know if business owners are really ever going to take that seriously.”
While many retirement-age business owners are looking to sell, they usually desire an internal transition of the business to a child or an employee, according to Friar.
“Many times that doesn’t work out, and oftentimes it’s because it’s a difficult conversation and they delay it,” he said. “It’s also a lack of actual planning. A lot of business owners kind of wake up and do their tasks and make their money and they go home — then repeat.”
Sufficient planning can help sellers get a higher price and also decrease the amount of time it takes to sell their business, Friar said.
Although the number of deals reported per broker has gone down nationally, total deal value has increased on a year-over-year basis, a sign of growing prices, according to the BizBuySell report.
“There may be fewer businesses out there now than there were a year or two ago, so that might be driving prices a little bit higher as well,” Friar said.
Both sales and transactions are still on the rise at Calder Capital, according to Friar. The company has closed on 17 transactions so far this year, just one shy of the total deals it closed in all of 2018.
“Look at the cranes in the sky. West Michigan continues to be a place where people are investing,” Friar said. “People want to buy businesses here and they want to start businesses here.”
A client of Calder Capital, Heath Verstraete, recently purchased Conveyability Inc., a Grand Rapids-based provider of warehouse conveyor systems and lift tables. He started searching the market about 18 months ago after he “got the itch to buy a company,” Verstraete told MiBiz.
“To me, it wasn’t so much the exact company as much as it was a viable long-term business that will sustain itself,” Verstraete said.
He evaluated 10 to 15 businesses in the area before deciding to purchase Conveyability. The workforce and culture of the company, which currently employs 13 people, were big selling points for Verstraete, who acquired the business from retiring former owner-operator Bob Sokorai.
“He’s 78 and he’s retiring and just getting out of it,” Verstraete said. “I’m happy for him and his wife, who poured their heart and soul into this business for 31 years. Maybe we can build on the fruits of their labor.”