When is the right time to sell your board house? Who is going to buy it? What is a buyer looking for in a PCB fabrication business?
These are questions I hear all the time particularly in the past few months as many owners are reaching an age when they are thinking about retirement. So I thought it was time to ask a mergers and acquisitions (M&A) expert some of these questions, and there is no one more knowledgeable than my good friend Tom Kastner.
Tom has been involved in a number of deals—many of them in our own industry. His knowledge of the mergers and acquisition area far surpasses anyone else I know in the industry. The good thing about Tom is that he is willing to take on deals of all sizes from the very large, to the more realistic (less than $10 million) deals that would apply to most board shops around today. So if you have been thinking of selling your shop, or better yet expanding your business through acquisition, then read and enjoy.
Dan Beaulieu: Tom, thanks for taking the time to talk with me today. First of all, tell me a little about yourself. What is your background?
Tom Kastner: I started off in electronics working for a Japanese company, Hakuto. They are known in the PCB industry for their cut-sheet laminators and exposure systems, but actually most of their business is in the distribution of semiconductors, equipment, and components.
Beaulieu: And how did you get into the M&A business?
Kastner: After working in electronic component sales in Japan with Hakuto for a number of years, then after getting an MBA, I headed up Hakuto’s corporate investment program. We acquired a few U.S. tech companies, and made strategic investments in the U.S. and Europe. From 2003, I have been an independent investment banker, representing both sellers and buyers.
Beaulieu: I know you have sold a number of electronics companies, including PCB fabrication and assembly companies; how did you get involved in our industry?
Kastner: In 1998, Hakuto sent me from Tokyo to Schaumburg, IL, to run their U.S. operations, which included their PCB equipment division. Between Hakuto and their OEM partners, we had equipment in the majority of the board shops in the U.S. at the time.
Beaulieu: Without naming names—or name some if you want—tell me about some of the deals you have done in our industry during the course of your career.
Kastner: I have worked on five PCB shop deals and also sold one assembly company (APlus Products) in the past. Revenues for these deals were between $5 million and $25 million.
Beaulieu: Okay so you do have the experience and the background, that’s for sure. Let me ask you some specific questions then. Is this a good time to sell a board shop? If not, when would be a good time to sell a shop?
Kastner: Timing the market is difficult. The best time is when sales and profits are increasing, not just for the seller but for the potential buyers as well, and when the economy is good in general as well. Also, it has to be a good time for the owner, on a personal basis, to sell. The owner has to be committed to getting a deal done, or it will never happen.
Beaulieu: Can you describe to me the ideal board shop? By that I mean what makes an attractive acquisition package?
Kastner: Growing and profitable is important, having good technology without being too exotic, and a history of making investments in technology and equipment is critical. Other key items are blue-chip customers (without too much concentration), skilled employees (and little or no key-person risk), and efficient operations.
Beaulieu: Let’s use an exact hypothetical. Say I have a $20 million board shop, they do flex and rigid-flex and rigid boards/3-mil lines and spaces. They have a mature work force and a good solid sales team of five direct and six independent sales people. They do some marketing. And they are mildly profitable say make about $4 million a year on their twenty million in sales. What do you think they could get for that shop? Please add other facts to complete the hypothetical if you feel it will help you to develop a more accurate example.
Kastner: It’s complicated, and if you asked 10 buyers you’d get 10 different answers. A general rule of thumb in this industry is about 4−5X adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). By adjusted, we mean that typical add-backs include excess owner’s compensation over market, discretionary compensation, one-time expenses, excess rent, etc., (conversely, below-market owner’s compensation should be deducted from adjusted EBITDA). There are a wide range of factors that can determine price, and then we still have to discuss terms. Typically, 100% cash on the barrelhead is rare, as buyers ask for earn-outs, seller’s notes, escrows, etc., which can vary widely. The terms depend a lot on the stability and growth of earnings, as well as any pros and cons of the business.
Beaulieu: Very good. Now how about this: Someone has a shop that he is thinking about selling, but not immediately. Let’s say he wants to sell it in a year; what are the steps he should take to make his shop an attractive target one year from now?
Kastner: One thing I see a lot of owners skimp on is the overall appearance of the shop. Similar to selling a house, curbside appeal matters: fresh paint, full lighting, refresh the parking lot, update the website, remove excess/old equipment from hallways and the exterior, etc. This is something that is relatively inexpensive and easy to accomplish quickly. I also recommend getting audited financials or at least a review, and preparing for due diligence by getting all records in order. Finally, an owner should talk to a tax advisor, estate attorney, wealth advisor, etc. to make sure their goals are set and their houses are in order.
Beaulieu: Let’s take this from the other point of view, from the buyer’s point of view. What are buyers looking for? What are some of the reasons they would buy a shop?
Kastner: The main reasons to buy a shop are to increase sales and profits, gain customers, expand geographically, and to gain technology. Some buyers also look to lock up and support a key supplier.
Beaulieu: What are they looking for in a board shop?
Kastner: A shop that is growing and profitable, has good equipment and technology, long-term employees, blue-chip customers, and few “issues” (such as environmental, legal, etc.), will be attractive to buyers. Buyers also want to know that the owners are reasonable, not only in terms of price and terms for the business, but also through due diligence and the transition period.
Beaulieu: Okay thanks. Now if someone is going to sell a shop what do they have to do? Say they contact you to sell their shop, can you give us a step-by-step blueprint of what happens from when they contact you to when the sale is completed?
Kastner: First, I want to get to know the shop better as well as review the financials. This usually includes a visit to the shop if I have not been there lately. Next, I discuss the possible range of price and terms with the owners to make sure we are on the same page, and we review the pros and cons of the business. If we are in the same ballpark as far as price and terms are concerned, and there are not too many issues with the business, then we start the project. It usually takes 1−2 months to complete the marketing materials, and about 2 months to contact buyers, sign NDAs, send out confidential memos, answer questions, and arrange visits. We work towards signing a Letter of Intent with one party, then enter due diligence. Due diligence and negotiating the legal documents usually takes 60−90 days, but it can be shorter if the seller is well-prepared and the buyer is highly motivated. The process typically takes 9−12 months, but can be shorter or longer depending on the circumstances.
Beaulieu: Great answers, Tom, I appreciate your candor. So while we are being candid, can you give me some idea of how much it costs to sell a shop, in other words what is the final structure of your fee? How much do you cost?
Kastner: I cannot quote a project without knowing more about the business, but the general terms include a retainer and/or upfront fee, a success fee at closing, and travel expenses.
Beaulieu: We’ve talked a lot about selling shops but you also help people buy shops as well. How does that work? Tell me about those services. What you do and what the fee structure is for helping someone buy a shop.
Kastner: First, I get to know the buyer and their strategic goals, as well as their financial ability and their general ideas on valuation and terms. Next, we agree on a target list, and I start contacting the owners. From then on, the project mirrors what goes on with a sell-side project. This type of project also includes a monthly retainer and a success fee at closing.
Beaulieu: Well, Tom we have taken up enough of your time, but before we wrap this up do you have any last words of advice for our readers?
Kastner: It’s important for owners to prepare their business as if it could be sold tomorrow, and much of that preparation should help the business anyway: continue to invest in technology, people, brand-recognition, and equipment. Also, slap a fresh coat of paint on the building and get rid of that drilling machine from 1975 that’s been rusting in the warehouse!
Beaulieu: Thanks, Tom. How do people get in touch with you if they are interested in selling or buying a shop?
Kastner: I’m always happy to talk.
Tom Kastner is the president of GP Ventures, a tech-focused M&A advisory firm.