Healthy economy and retiring boomers should fuel manufacturers’ growth

Brian Pedersen//February 4, 2020

Healthy economy and retiring boomers should fuel manufacturers’ growth

Brian Pedersen//February 4, 2020

The progress of innovation in manufacturing and the availability of investment capital have created an environment that’s primed for merger and acquisition activity in 2020. PHOTO/GETTY IMAGES –

The progress of innovation in manufacturing and the availability of investment capital have created an environment that’s primed for merger and acquisition activity in 2020.

Experts are seeing a healthy economy, for now, and a high number of aging business owners could mean 2020 will be a strong year for selling and buying activity in manufacturing.

“My view is yes, there will be transactions throughout the year,” said Joseph Zimring, director of Lehigh Valley Search Fund LLC in Allentown, a company he began that’s looking to buy a business. “I would encourage business owners to consider those types of buyers who are independent. That provides business owners that are maybe considering an exit a different set of expectations.”

Many companies, including manufacturers, look to acquisition as a way to grow their business, said Richard Hobbs, president and CEO of Manufacturers Resource Center in Upper Macungie Township.

He believes there will be more mergers and acquisitions this year for several reasons: the availability of cash from the 2017 Tax Cuts and Jobs Act legislation, low interest rates, innovation in manufacturing, and the growing number of baby boomers who are business owners.

“Everyone is sitting on some cash, the tax cuts helped everyone on the corporate side,” Hobbs said.

For one Berks County M&A expert, it’s not easy to determine whether there will be more mergers and acquisitions for manufacturers in 2020.

“It’s really going to be dependent on the economy,” Randy Raifsnider, partner in the management advisory services group at Herbein+Co. of Spring Township. “We have not seen a slowdown of mergers and acquisitions. I think it’s tough to say if there’s going to be an increase.”

More innovation = higher value

Innovation helps make companies attractive to both buyers and sellers.

“The companies that are innovating more and have more to offer are usually higher valued,” Hobbs said.

As an example, East Penn Manufacturing in Berks County bought a lithium-ion company last year instead of developing the technology on their own. Developing new products can take years, whereas acquiring a company that already produces it is a quicker process, Hobbs said.

Innovations give manufacturers the ability to diversify their cash flow and most have multiple lines of products, added Raifsnider.

The high number of baby boomers reaching retirement age also gives buyers more choices, he said.

“What we have seen is a lot of individuals who want to transition out of their business,” Raifsnider said. “I think with some of the warning signs out there that the economy is teetering a little bit, people are getting a little nervous; things are starting to slow a little bit.”

Timing is critical

Buyers want a business that’s stable and if possible, one that’s demonstrated an ability to sustain operations during the last recession as there’s talk of a potential recession on the horizon, he added.

“In eastern Pennsylvania, there’s a dense manufacturing base,” Zimring said. “There are business owners that are rightfully thinking about what’s around the corner. I think the baby boomer generation is really a part of this.”

Baby boomers who are approaching retirement and who own these businesses may not have children, or their children may not be involved in the business so they need a buyer.

Timing is important too, because if another recession arrives, business owners would have to wait several years for the economy to turn around again before it would be an attractive time to sell, he added.

“I think there is a window that has presented itself where in 2020, for certain buyers, it could be an attractive time to sell,” Zimring said.

Sellers should be aware of the types of buyers out there

When it comes time to sell, business owners should be mindful of the different types of buyers in the market.

The trade/strategic buyer is often looking to acquire a similar company that’s doing the same thing and wants to keep it operating for a long time, Hobbs said. Meanwhile, the financial buyer is more concerned with numbers and could be a private equity or venture-capital company.

“The trade/strategic buyer wants something that fits well and hangs onto it for a long time,” Hobbs said.

“The financial one is just looking for numbers, something that makes them more money than they already have.”

The sellers should be thinking about what type of buyer they want, he added. Often, a financial buyer will hold onto the company for only a few years, or decide to relocate or shut the company down.

If the company is family owned, or independently owned, the buyer with an entrepreneurial or strategic approach would keep it as is, Zimring said.

“There will be entrepreneurs in the market,” Zimring said. “I think that’s a trend. I think there are business owners who recognize that. An offer is going to look and feel different if it’s more of an entrepreneurship through acquisition.”

A buyer that’s operating in that manner is looking for a healthy company, a business that’s enduringly profitable and has a history or strong cash flows, Zimring said.

When thinking about what’s best for the future of the company, the buyer and seller should have experienced advisers that they work with, he said.

Typically, a financial buyer might sell the company sooner while a strategic buyer or a family member who buys the company would likely hold onto the company for a longer time, said Raifsnider.

If a company is sold to a family member or strategic buyer, that’s a good indicator that the new owner wants to grow the company.