(Green Bay, WI) Supply chain shortages are having profound impacts on nearly all sectors of the U.S. economy and are directly impacting the mergers and acquisitions (M&A) world as a result. That’s according to M&A expert Scott Bushkie, President of Cornerstone Business Services, and author of the book: “Finish Strong: Sell Your Business On Your Terms.”
“There’s a significant imbalance in supply and demand and the disparity is threatening M&A deals that, in a ‘traditional’ economy, were sure to close,” said Bushkie. Today’s reality is that when a buyer looks to acquire a company, supplier due diligence is one of its top priorities. Companies are looking for businesses that have a strong and diversified supply chain. “That wasn’t the case just a year or two ago and it’s having a major impact on the M&A industry,” Bushkie explained. “Potential deals are being pulled off the table as a result of supply chain issues.”
In the past, buyers were relatively relaxed about possible supply challenges. Today, buyers are laser focused on supply chain due diligence. This includes determining if the business they are interested in has multiple suppliers, the length of their supplier relationships, strength of supplier operations and more. If the buyer isn’t satisfied, they simply walk away.
“It’s happening more and more often,” said Bushkie. “In fact, my firm brought a business to market this year that had backups and prototypes for nearly every single component they used in their production process. And yet, they had one essential circuit board without an alternate supplier. That circuit board was an issue every potential buyer honed in on.”
The end result was the business was taken off the market while the company identifies a reliable secondary supplier.
To combat this trend, many companies are purchasing larger quantities of inventory, at higher-than-normal costs and storing it until needed. “It’s gone from ‘just-in-time’ to ‘just-in-case’ supply needs,” Bushkie said. “It’s a great solution if you’re not selling your business but this approach can have serious impacts on the working capital that a potential buyer is anticipating with the purchase.”
Working capital is the money a business has to meet its short-term obligations. It’s like gas in a car; you can’t sell a car without gas. Without sufficient working capital, most buyers will walk away or ask for the seller to reduce the sale price to compensate for the shortage. That doesn’t typically go over well with the seller as they look at overstocking as a onetime occurrence whereas the buyer sees this as something that may occur for the foreseeable future, impacting profitability.
Bushkie says a solution is for sellers to bring working capital to the front end of the negotiation process instead of it taking place after initial discussions occur. “We recommend and encourage sellers and their advisors to stipulate exactly how working capital will be calculated before accepting offers,” Bushkie explained. “This streamlines the process by establishing expectations upfront.”
It’s a solution all sellers will need to consider as supply chain concerns are anticipated to continue well into next year.