July 2011 - There are definite nuances to selling companies in the metals industry that often do not apply in other industries. The reality of the situation is that understanding the potential buyer’s point of view is the most important consideration. Some of the issues raised below can affect the type of buyer that is best for the shareholders and the business. The point to be cognizant of is the best strategy for a private business owner may not be what is attractive to certain buyers.

Who is the potential buyer?
The two basic buyer types are strategic and financial. As investment bankers in the metals industry, we tend to look for and position a company for a strategic buyer. As manufacturing in the United States has slowed down during the past 10 years, almost all segments of the industry have consolidated or begun to consolidate.

Both strategic and financial buyers are looking for profitable well-run companies, but there are noteworthy differences in their targeting criteria. Strategic buyers often are looking to fill in a geographic or product market niche, whereas financial buyers are more focused on consistent cash flow and a management team that will stay with the business for the next five to seven years.

The following are some of the major areas to think about during the period prior to a sale that can affect how the business may be viewed by each buyer type. Admittedly, some of these areas can take years to develop, and others may be accomplished shortly prior to a sale.

Revenue: All buyers are looking for growing companies, and it is rare that a premium price is paid for companies that have not shown some growth. Business owners and financial buyers are interested in revenue stream diversification that stabilizes cash flow and generally makes the business easier to manage. For example, a ferrous or flat-rolled processor may consider diversifying into nonferrous or long products that serve different end markets. On the other hand, a strategic buyer’s existing business will provide diversification on the revenue side. Accordingly, strategic buyers often are looking to fill a niche they currently do not serve, such as a geographic concentration or product line with dominant market share.

Management: Many business owners have a difficult time turning over the reins of a business to a team of managers. This is sometimes not a concern for strategic buyers because they are not looking to acquire high-level, long-term management. However, financial buyers are concerned with key man risk. Financial parties are worried the business owner will leave before they have found a suitable replacement. This is part of the reason many financial parties are looking to have a seller retain a meaningful ownership stake after the sale (20 percent to 30 percent). Recent consolidations have created several high-quality metals industry executives looking for opportunities, but a financial buyer will not go into a situation assuming they can find one.

Operations: Financial buyers are looking to invest in a business to improve its profitability while growing the top line. Business owners that are getting closer to retirement begin to shy away from making major investments because of their changing risk profiles. If there is no improvement to be made, they cannot create further value to justify the investment. That said, strategic buyers may be able to bring something to the business that the seller may not have available to them. For example, purchasing economies can reduce per-ton purchasing costs that are not available to a smaller business.

Preparing a company for sale
Business owners need to prepare the company based on the type of sale that may be available and the type of buyer they want. Strategic buyers generally provide the highest purchase price, but financial buyers can provide risk diversification and a risk profile that can bring the business to a new level. Some business owners have sold 70 percent of a company to a financial buyer and received more money upon a second sale three to five years later.

There is a long list of issues to address when preparing a company for sale, such as accounting procedures, human resources review, non-core asset disposal, etc. However, taking time to evaluate the strategic positioning of the company can create substantially different results for a business owner.

To learn more about the mechanical aspects of preparing a company for sale, please visit www.modernmetals.com/estateplanning. MM

Vince Pappalardo, managing director, and Chris Merley, vice president, of Stout Risius Ross specialize in M&A advisory for companies in the production and distribution of both ferrous and nonferrous metals and alloys. Thomas Tyndorf, director in Private Banking USA at Credit Suisse, along with David Berek, partner with Handler Thayer LLP, will be contributing to upcoming columns. For more information, contact Vince at vpappalardo@srr.com or visit www.srr.com

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