Asking Yourself … “Should I Sell?”

On Monday we reported that we had heard that Maurice Electric, Washington DC, had sold their business (to USESI, which operates Electrical Wholesalers) (read the press release). Since then we have heard of a couple of other deals that are nearing, and some that appear to have fallen apart. So we did some investigating to understand what may be driving the activity. The feedback we received was:

• With a change in administration, and possibly party in control, capital gains taxes could change, hence spurring people who were inclined to sell, to sell now.
• The economic slowdown is challenging a number of smaller companies. They are facing increased competition, lower margins, increased costs, challenges in finding qualified people, increasing DSOs causing cash flow shortages and more. Plus the outlook going forward, in many parts of the country, is “hazy” to say the least. It appears that size does have its advantages.
• According to the NAED 2007 PAR report, distributor net profit was 3.2%, down from 3.7% the prior year, and with increased costs this year, there are expectations that industry net profit will further decline (and do you think companies that don’t have good financials take the time to submit for the PAR report?)
• The industry is undergoing a generational transition, and if there isn’t another generation that has been working in the business for 5-10 years, who takes over?

Given the changes, it isn’t a wonder that companies, especially smaller companies (<$20M) are considering their options. In the words of one distributor executive, “If you are considering an exit strategy for sometime in the next three years, now is the time to do it. Times will get tougher. If your horizon is 10 years, then you will be fine.” Which gives thoughts to questions that distributors should be asking themselves:

1. What is my time horizon?
2. If I am family owned, is qualified family in the business?
3. How strong is my management team?
4. What are my goals?
5. What is my vision for the company?
6. Are we structured, and have the ability to finance, the initiatives to achieve my/our vision?
7. How profitable is the company and what can be done to improve it?
8. What is my competitive environment? Can I compete with them for another 5-10 years? If I was to sell, to whom and how could I maximize my return? (what is my real book value?)
9. How much could I get for my business?
10. What would I want for my business? Percentages and multiples are justifications to reach a number. Is your number “real” / achievable?

These are just some food for thought. Depending upon your answer depends upon how you manage your business … manage for short-term profitability while positioning the company to best suit an acquirer or invest for the long-term and develop market share, growth and profitability strategies?

While we don’t know the specifics of the Maurice sale, we surmise that ownership asked itself many of these questions, and had advisors to help.

Even though there is a credit crunch, some companies are not dependent upon outside capital markets, others are very strong and are already “pre-approved”. Deals will still get done and size does matter. Look for progressive regional, super-regional and some nationals to be active. The biggest challenge is smaller owners understanding the real value of their business, being guided by advisors who understand the electrical industry, and selling while the business has value. Look for consolidation to accelerate in the coming months.

And if you are an acquirer, this could be an opportune time to deploy your resources.

Your thoughts?

P.S. As evidence, Border States purchased Harris Electric in Tennessee. For a company based in the northern Midwest/upper Rocky Mountain area and Southwest, why acquire in Tennessee?