What is your experience in search funds acquiring manufacturing businesses?

October 18, 2019

by a searcher from London Business School in London, UK

Traditional search fund model criteria would exclude any kind of manufacturing businesses due to the limited scalability and non-recurring revenue. However, there could potentially be a case for specific types of manufacturing businesses, i.e. high value, asset-light manufacturing with a strong branding element and some share of private label in-sourcing, or a roll-up strategy to gain scale.

I would be very interested to learn about any success or failure case studies in the search fund space on this topic.

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Reply by a searcher
from Brigham Young University in Salt Lake City, UT, USA

My experience is there are a number of manufacturing businesses that offer scalability (on production, distribution and/or aftermarket side), Recurring revenues are typically generated on the aftermarket side, subject to the type of product. The are a number of verticals - think production equipment manufacturers, oil & gas, transmission & distribution, power, specialty vehicles - where you are looking at a infrastructure/fleet that is very aged. Just recently spent time on two assets (in my day job) that are applicable: 1) there are 600k school buses out there with an average age of 11+ years. The typical replacement cycle happens when buses are ~15 yrs old. Big opportunity for aftermarket/repairs on old buses + replacement sales. 2) The average mid-sized power transformer in the US is close to 40 years old (many installed during the early baby boomer days), which creates meaningful parts/services demand and promises a strong replacement cycle.

Reply by a searcher
in Markham, ON, Canada

I just acquired just such a business. www.hathorncorp.com. In my view industrial product companies are overlooked. Too much emphasis is given to "contracts" which you'll pay a high multiple for (very high in this market!) only for them to evaporate post-close. We have no contracts but our business is ~50% parts and service revenue which MUST be done by us. This is thus recurring and highly valuable. EBITDA margins are about 50% on revenue so scalaing, while tricky, will pay hefty dividends. Multiple was just under 4X so IRRs are fantastic.

Just something to keep in mind when everyone is fishing for the same fish in the same pond with a high strike out rate. Happy hunting.

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