Manufacturing & Distribution Company
The Situation
The subject company is a manufacturing and distribution company that has been and is very successful and growing fast. Their growth was organic and centered around two proprietary products. Their only personnel weakness was the lack of a product engineer.
One of the products they distributed was from a small manufacturer whose owner was in his mid-60s, was not a good business person but was a great product designer and engineer. The potential buyer was attracted to acquiring this small manufacturer for three reasons.
To have 100% of the product distribution, therefore getting higher margins (by eliminating the middleman, which is what his firm was).
He could bring the manufacturing in-house and eliminate most of the overhead (by getting rid of rent, phone, bookkeeping, etc.). As part of an eventual exit plan, he wanted to prove he could buy another business and assimilate it into his operation.
Intervention
While there had been some casual conversation between the two owners, once I was brought in we picked up the pace. We met with the seller and seriously talked about a buy-sell transaction. We discussed the company’s operations and the seller’s role post-closing. One thing we didn’t initially discuss in detail was price or terms.
When a business is being sold it is customary that the seller or his or her intermediary prepares a “book” or memorandum about the business. We flipped the usual roles on this and prepared a presentation book for the seller and his wife. As the seller was an engineer, our book gave him the logic to analyze and support his decision.
Our presentation included:
- Valuation methodologies
- Comparable deal statistics
- Another justification for the offer
In addition, we included reinforcement on why the seller told us he was interested in selling (his hot buttons), his future role as a product engineer for the buyer, and a section on what makes a business an attractive acquisition candidate. This latter section was to show why his business would be tough to sell to an individual buyer (because the business was him; the company was completely dependent on him).
Most importantly, we appealed to his emotion along with his logic and gave full justification for the price. I like to say that the true economic buyer in a small business buy-sell deal is usually the spouse. In this case, it was very true and his wife had the idea that because they had owned the business for 30 years it was worth a lot (more than it really was). She equated value with longevity.
The Result
The combination of logic, emotion, and complete backup information worked. The deal closed and the integration into the buyer’s company was a success. The company’s production was brought into the buyer’s shop and the seller became a part-time product engineer who worked on all of the company’s products.
This was a win-win deal that provided:
- The seller with an exit strategy.
- Higher margins on what now became one of the buyer’s proprietary products.
- The successful implementation of growth by acquisition strategy.
