Punching Out!: PCB/PCBA M&A Top 10 FAQs

We talk with owners a lot about the possible sale of their businesses. Here are the top 10 questions asked by PCB/PCBA shop owners about the process:

1) What is the value of my business?

For companies in the PCB/PCBA sector, companies generally sell in the 4−6 times adjusted EBITDA range. Some companies sell for less if they are not profitable or have not been investing/growing; some will sell for more if they are growing rapidly or have something special. Shops at the low range may sell for slightly above liquidation value (net current assets plus fair market value of equipment), which is a major reason why many small shops do not sell. A lot of different factors go into a valuation, and the terms can vary widely as well. The terms generally consist of cash, seller’s note, earn-out, carryover equity, consulting fees/salary, etc. Most deals are completed on a cash-free, debt-free basis as a purchase of assets. Buildings/real estate are usually handled separately.

Most asked follow-up question: What is adjusted EBITDA? EBITDA is earnings before interest, taxes, depreciation and amortization. Adjustments often include normalizing owner’s compensation, adding back personal expenses, adjusting rent if the owner also owns the building, etc. It is also called Seller’s Discretionary Earnings in some cases.

2) How long does it take to sell?

The sell-side process usually takes 9−12 months from the time an intermediary is signed up. It can be shorter if a strong buyer appears early in the process; it can take much longer if the business starts to decline or if there are major issues that come up during due diligence. In the case when a strong, well-financed unsolicited buyer approaches a seller, a deal can take less time, if both parties move quickly and no issues come up.

3) Who are the likely buyers for my business?

Likely buyers are strategic companies in the same or related industry, private equity firms (either as platform or add-on acquisitions), and individuals. Strategic buyers often offer the highest valuation, but they may want to close down the shop or otherwise change the legacy.   The best buyers are sometimes strategic buyers who are not the most obvious fit. Private equity firms are fairly prominent in both the PCB and PCBA sectors. They’ll typically look for at least $1 million of EBITDA for a platform acquisition, but will acquire smaller companies as add-ons. Individual buyers are rare for shops with over $10 million of revenue, but common for the $5 million and less level. Foreign buyers are very interested in the U.S. market, although many of them are cautious about having too much military or government business. We always say, “The best buyer might be just down the street, or may be on the other side of the world.”

4) I want to keep it quiet; why should I contact more than 1-2 buyers? 

It is best to have a few buyers competing for the business. Not only does this keep buyers honest, but it provides a few backups in case something happens with the primary buyer. The need for confidentiality must be weighed against the extra millions of dollars that competition may bring. That being said, sometimes a well-financed unsolicited buyer is a great buyer. If a buyer is out looking for companies to buy, they have a strategic need to do deals. An owner should be ready to respond quickly if the right buyer comes around.

5) How do we maintain confidentiality?

Intermediaries typically use a blind executive summary to contact buyers, which includes enough information to attract buyers but not enough to allow them to guess who the seller is. NDAs are signed with buyers who express an interest, and the NDA should be reviewed by the seller’s attorney prior to going to market.

6) What is the advantage of using a broker/intermediary?

The main advantages are attracting multiple buyers, negotiating on behalf of the seller, and developing professional materials.  One of the main reasons why deals die is because the business starts to decline, and using an intermediary allows the owner to focus on the business. Also, many owners have an exaggerated expectation of value, which an intermediary can help temper. A good M&A firm will review financials and perform sell-side due diligence, which can help uncover issues with the business. Finally, using an intermediary is a strong sign to buyers that the seller is serious.

7) What is due diligence?

Typically, full due diligence begins once a letter of intent (LOI) is signed. The buyer already has a lot of information prior to signing the LOI, and due diligence is used to confirm the information that has been received as well as to uncover any major issues with the business. DD usually takes 60−90 days; it can be shorter if the seller is prepared and the buyer is motivated, longer if any issues come up.

8) We just purchased new equipment; does this increase the purchase price?

It can, as everything is negotiable. A buyer might think that the company was under-invested before buying the equipment, and the purchase just got them up to speed. If the equipment is purchased to expand capacity or services, the benefit of which will mostly accrue to the buyer, then the seller should receive some credit for new equipment. Often with smaller shops, the owners have not been investing, which can be reflected in the purchase price. With larger shops, it is expected that the equipment be on par with the level of business, so the purchase price can be adjusted up or down accordingly.

9) What can we do to increase the value of our business?

Businesses that are profitable, growing, have updated equipment and facilities, a good management team, and are doing something ‘special’ generally have above average valuations. Some of the issues that can hurt valuation are key-person risk, customer concentration, outdated equipment, dirty/disorganized facilities, poor financial reporting, a large portion of plain vanilla products, and a lack of investment in training.

10) When is the best time to sell?

 Woody Allen said something like “80% of success is knowing when to show up, 20% is knowing when to leave.” An owner should always be prepared to sell in case a strong unsolicited buyer comes up. The best timing is when the business is doing well, the company is prepared, and the industry and economy are doing well. However, this generally means that others are selling too, and buyers are busy with their business and have a lot of sellers to choose from.

The owner must be prepared personally to sell. For example, the owner’s personal affairs and records must be in order, and key advisors should be consulted (corporate/estate attorney, CPA/tax advisor, wealth advisor). Other stakeholders, such as family, partners, and key employees, need to be on the same page. Also, it is usually a good idea to have a plan for post-closing/retirement activities, as a strong set of goals is good motivation for getting through the sale process.

Good advisors are always glad to further answer the above or other questions. Every business is different, so each owner should contact their own personal advisors.

Tom Kastner is the President of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. Securities transactions are conducted through StillPoint Capital, LLC, Tampa, FL member FINRA and SIPC. To read past columns or to contact Kastner, click here.

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2017

Punching Out!: PCB/PCBA M&A Top 10 FAQs

11-13-2017

We talk with owners a lot about the possible sale of their businesses. Here are the top 10 questions asked by PCB/PCBA shop owners about the process.

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Punching Out! Case Study—Lessons on a Deal

10-19-2017

This is a story of one of our clients, a U.S. contract manufacturer that sold a few years ago. To maintain confidentiality, the names have been changed and the details slightly modified.

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Punching Out! Making the Process Easy (M&A Process Engineering)

09-06-2017

In the M&A world, there are companies that make it easy (or at least easier) and those that make it difficult. By making the process easier, sellers should see better valuations and terms, and have a smoother deal process.

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Punching Out! Bridging the Valuation Gap Between Buyer and Seller

06-13-2017

PCB acquisitions in the U.S. are down so far in the first five months of 2017, with only two announced deals (HT Global Circuits’ acquisition of Pho-Tronics in April; American Standard Circuits’ acquisition of Camtech in May); and one anonymous deal that I am aware of that has not been announced. This compares with 11 announced deals in 2016. There are a variety of reasons for the decline, but one reason could certainly be the valuation gap between buyer and seller.

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Punching Out! How to Put a Wrench in the Rumor Mill During the Sale of a Company

05-23-2017

When selling a house, the owner’s agent puts a sign in the front yard, posts info on the Web, and invites buyers over for an open house. When selling a car, we put a sign on the windshield and take out an ad with our phone number on it. However, when selling a business, some owners do not even tell their spouses.

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Punching Out! Selling a Company—Seeing it as a Triumph, Not a Defeat

04-25-2017

Somehow, there is a still a stigma that selling a company is a negative for the owner. Many people think that there must be something wrong, otherwise, they would not be selling. In reality, exiting a business should be looked at as a triumph for the owner, not a defeat.

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Punching Out! 10 Ways to Increase the Value of Your PCB/PCBA Shop

03-22-2017

I have worked with a wide range of companies in the PCB, PCBA, and other tech and electronics sectors. Through the years, I have developed some ideas on how companies can improve their valuation. Some of these ideas are simple and involve little cost, other ideas are more long-term and involve more effort or investment.

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Punching Out! When Should I Call an Investment Banker?

02-20-2017

The quick answer is ASAP. Even if you are not considering the sale of the company for 5−10 years, it is best to be educated and prepared. Give your advisor (or a few advisors) a call to discuss what can be done to get the company ready for a future sale. The worst time to call an i-banker or business broker is when you are forced to sell due to poor performance, health issues, pending bankruptcy, or dispute with a partner or manager.

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Punching Out! Types of Company Buyers in the PCB and EMS Sectors

01-09-2017

Mergers and acquisitions in the U.S. PCB sector have been in the news recently, with at least 12 deals completed over the past year, and several more in the works. In contrast, the EMS sector has been relatively quiet, but that may change now that the presidential election is over.

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Back

2016

War Stories from the Front Lines of Deal-Making

09-16-2016

Here are some war stories from my experience in working on M&A deals in the PCB, EMS, and electronics fields. The names and details have been changed to protect the innocent.

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Timing: When is the Best Time to Sell?

08-18-2016

A few of the top questions we receive relate to the timing of the sale of a business. The first is, "Is now a good time?" The second one is, "How are market conditions?" These are the top FAQs.

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The PCB Sector—What Buyers Look for and Recent Deals

07-14-2016

The past few months have seen a rash of PCB deals in North America, for a variety of reasons.

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What the Heck is Adjusted EBITDA?

06-07-2016

If you are looking to sell or buy a business, you will most likely come across the term ‘adjusted EBITDA.’ Other common terms are adjusted cash flow, owner’s discretionary earnings, earnings after add-backs, etc. What do these terms mean, and why are they important?

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The Additive Process: Tips on How to Buy a Board Shop or Assembly House

05-14-2016

One of the quickest ways to grow a business is to acquire another business. At the same time, acquiring a business can be risky, and a really bad deal may put your original business in jeopardy. Here are some tips on how to make acquisitions.

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Your Baby’s Ugly, Now Get Over it (How to Work with Buyers)

04-14-2016

Here’s a scenario: An owner has gone to market and is starting to get feedback from buyers, and shockingly, not everyone appreciates the hard work and achievements that went into the business. Buyers may not understand the business, or they may be trying to position things for a low offer. In any case, it is important to know how to work with buyers.

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Putting Together the Deal Team

03-21-2016

When preparing to sell, remember the old saying, “He who represents himself has a fool for a client.” While many owners might be tempted to go it alone, in my experience it pays to have a deal team to help prepare a company (and the owner) for a sale

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Punching Out: How to Sell Your PCB/Assembly Shop

02-04-2016

You are thinking of selling your PCB or assembly shop. Perhaps you are contemplating retirement, you have no successors, and the thought of going to the office on Monday is driving you crazy. This column is designed to help your planning efforts. Future columns will go deeper into each subject

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