Inside the Price Tag: Factors That Can Influence M&A

It’s no secret a manufacturing business that demonstrates financial stability and profitability will appeal to potential buyers, as will a competent management team, efficient production methods and superior quality control standards, among others.

And while those are critical requirements when looking to ultimately spend millions – or even billions – of dollars on a manufacturer, other factors can affect a potential transaction. These are often attributes and qualities not found on a balance sheet or in corporate documents. They can be found in relationships with suppliers, in companies’ corporate reputations and in adherence to rigorous compliance stands.

These qualities are especially important today, as a PWC survey found that while nearly two-thirds of CEOs indicated they had not made a major acquisition in the last three years, 60% of those same executives said they planned to do so in the next 36 months.¹

Differentiators could prove to be game-changers for attracting buyers

Leveraging advanced technologies and focusing on quality is essential for manufacturing firms looking to carve out a niche that resonates with their target audience. It’s not just about having a good product; strategic positioning in the market plays a pivotal role in enhancing visibility and allowing companies to swiftly respond to competitive challenges. Let’s consider these attributes as “crucial differentiators.” Ultimately, organizations that showcase features like sustainability and exceptional customer service not only strengthen their market standing but also ensure they remain the go-to choice for existing customers while attracting new ones.

Another key factor in the operational success of a manufacturing business is the strength of its relationships with suppliers— which has borne out during a lasting supply chain crisis. These partnerships influence everything from the capacity to meet or exceed market demands to the ability of manufacturers to negotiate favorable terms, ultimately boosting profit margins. Long-term connections with thoroughly vetted suppliers can lead to lasting agreements that benefit both parties, making this a significant advantage in the eyes of potential buyers.

Strong supplier relationships can also foster innovation. Working closely with trusted suppliers can create opportunities for new product development. The location of a manufacturing facility plays a crucial role, as it can reduce transportation costs and help boost the efficiency of the supply chain. Being near suppliers and distribution centers also helps streamline inventory management and allows for quick responses to shifts in market demand. Access to skilled labor and a solid manufacturing infrastructure can be a very positive factor for buyers.

When they are seeking investment opportunities, buyers will assess the growth potential within the manufacturing sector, closely looking at current market demand and emerging trends during their evaluation process. Importantly this includes a thorough review of market demand forecasts to understand the sustainability of anticipated revenue. By acknowledging these factors, strategic buyers are more likely to view potential acquisitions favorably, leading to investments that promise both immediate returns and long-term viability.

Culture and a stellar reputation 

Simply put, a company’s culture – defined by employees’ attitudes and behaviors – is the core of what influences a customer’s decision to do business with it or, conversely, to NOT engage in a business relationship. It can be argued that a strong corporate culture is even more important than the product being manufactured or the service provided. Let us call it an “important intangible.” The bottom line is that potential that if the company and/or its employees exude a culture that is less than robust.

A strong reputation recognition offers invaluable competitive advantages for manufacturing companies. A well-established reputation attracts new customers while fostering loyalty among existing ones. One also cannot overlook the environmental, social, and governance (ESG) factors that continue to shape the M&A landscape and become a key factor in influencing both corporate reputation and deal values.

Reputation, which can be tied to brand recognition, involves clear communication and delivering exceptional quality offerings and exceptional service, as customers will more often than not choose brands upon which they can trust and rely. And of course, that sterling reputation.

Risk mitigation

It’s not a question of “if” an organization is going to be faced with a crisis or issues management situation, it’s a matter of “when.” And their leaders should be prepared to deal with both known risks and unidentified risks.

The first type of risks may include a company’s financial strength, products they make or markets they serve and the thoroughness and robustness of cybersecurity programs. Organizations that are successful in managing these risks employ such tools as scheduled and controlled issues management and scenario training, a crisis handbook and a strong digital platform with a comprehensive view of their risk portfolio.

Some unidentified risks may be difficult to assess even over hundreds of scenario-testing events such as the vendor of a vendor of a vendor realizing a cybersecurity breach, a massive road collapse or train derailment. The best way to manage unidentified risks is through fostering a risk-aware culture – there is that acknowledgment to “culture” again – throughout the organization, one that empowers its people to perceive and react rapidly to an external issue.

In addition to those factors I have described, there are myriad other issues to consider during the M&A process – both from an internal and external perspective. Those manufacturing companies that have continued to take a long-term, holistic view of how to best prepare their organizations are going to be the winners.

¹ PwC: US Deals 2024 midyear outlook, June 2024

Randy Rua is president of NuVescor, a leading provider of mergers and acquisitions services for manufacturers in Michigan and beyond. He can be reached at rrua@nuvescor.com.

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