Are you thinking about selling your company? An investment banker offers some tips that will help make the sale glide through the transaction process.
Burke Burkhardt has had a front-row seat for several of the acquisitions that have reshaped the electrical industry over the past few years. But instead of just watching the action, he has helped make it happen. His firm, HT Capital Advisors LLC, a New York-based investment banker, worked with the owners of Tristate Electrical and Electronics Co. Inc., Hagerstown, Md., and Viking Electric Supply Inc., St. Paul, Minn., to sell their companies and is now working on several other deals. HT Capital's president, Eric Lomas, was chairman of the board of Rexel's U.S. operations, now based in Dallas, while the company's sales grew from $300 million to about $1 billion.
Burkhardt, HT Capital's senior managing director, sees several reasons for mergers and acquisitions in this business:
- The owner doesn't have family or employees who want to take over the business.
- Large, well-financed buyers want to bulk up their revenues and achieve economies of scale in purchasing, vendor relationships and information technology (IT) systems.
- Interest rates are relatively low.
- More distributors want to sell their companies now because buyers are paying more for distributorships than in the past.
- Owners are balking at the cost of new IT investments.
Burkhardt says smaller distributors are particularly concerned with the cost of upgrading IT platforms. "It's expensive to upgrade to the level that the largest companies can," he says. "We have visited with probably 50 distributors over the past year, and that certainly is on their minds."
The prices that distributors are being offered for their businesses are also tempting many owners to sell their companies, he adds.
"The multiples have gone up significantly, and there is more emphasis on earnings as opposed to years ago when companies were trading on the basis of book value. The multiples have been in the range of four-to-five times and are sometimes up to eight times Earnings Before Interest and Taxes on an adjusted basis (EBIT). The prices are very attractive, and there is a feeding frenzy going on."
The desire of the European distribution giants, Sonepar SA, Paris; Hagemeyer NV, Naarden, Netherlands; and Rexel SA, Paris, to expand from their strongholds in Europe to North America has contributed to this frenzy, he says.
"The Europeans' own countries are saturated, and there is not much they can do in acquisitions and overall growth, whereas in the U.S., our economy is doing well and there is a lot of expansion going on."
Whichever one of these factors has prompted an owner to consider a sale, it's obviously not a decision to rush into. Indeed, Burkhardt says an acquisition takes at least four to six months to close.
"In an ideal world, distributors should get in their legal counsel and accounting firm as early as possible," he says. "The earlier an owner learns about the mechanics of the sale process and confronts the many issues involved, the better off they are in positioning their companies for sale. That's in an ideal world. We prepare a thorough selling document. That takes some time, and the negotiating period takes a number of weeks, or months, if a distributor is talking to several parties."
Burkhardt doesn't see any stop in M&A activity over the next few years, and believes there will be some additional surprises in which Top-50 companies the consolidators acquire. He also believes another foreign acquirer or U.S. financial firm could get into the picture, and that after the companies that have made many of the acquisitions finish digesting these purchases, they may turn their attention to making smaller "add-on" purchases.
After alerting their accountants and lawyers of the potential of a sale, electrical distributors will then often meet with a broker to discuss the sale. Burke Burkhardt, senior managing director, HT Capital Advisors LLC, New York, says his firm asks owners to complete due-diligence questionnaires that will provide them and potential buyers with solid overviews of the companies. This questionnaire asks for the following information:
- Two or three years of income statements
- A budget statement for the current year
- Any unusual expenses anticipated
- Company history and future growth prospects
- The reasons why the owner wants to sell
- His or her objectives for the sale
- Markets served
- Most important vendor and customer relationships
- Competitive factors
- Management issues
- Inventory quality
- IT system issues
- Potential problems such as the loss of a key customer, lawsuits pending, environmental issues or write-offs