UHY Advisors M&A Strategies in the Current Market June 5, 2020 - - PowerPoint PPT Presentation

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UHY Advisors

M&A Strategies in the Current Market

June 5, 2020

Private & Confidential

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Introduction

Jeremy Falendysz

Director

Brandon Beauregard

Senior Analyst

Corey Massella

Managing Director

The UHY Team

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Introduction

▪ COVID-19 has upended traditional business models,

requiring lean personnel teams and efficient remote working conditions to navigate this crisis. Stress levels remain high as businesses begin navigating the complexities of a “new normal”

▪ Now more than ever, owners should complete a self-analysis of themselves and their

• businesses. It’s just as important for owners to understand their own decision making.

Standing at the top means the most responsibility, and is often an lonely position. Ask yourself these key questions:

▪ Are you in survival mode?

▪ High stress scenarios can cause tunnel vision and thoughts revolving around urgent needs now, rather than thinking long-term

▪ Is your ability to make decisions clouded?

▪ Often a business is your baby and, for most, a vital part of your net worth ▪ Business is personal, as it supports your life, kids, and family

The “New Normal”

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Introduction

▪ Once you have determined your base needs are met, you can begin to analyze your

business with an open mind. Here are some of the questions this presentation can help answer: ▪ Should you pour more money into your business to help it outlast this crisis? ▪ Are you mentally and emotionally prepared to continue your business? Or are you tired and looking to exit? ▪ Are there opportunities out there? What options are available?

▪ Based on past experience in the auto industry, strong companies with viable business

models can find opportunities, consolidations and available talent

▪ Before you make these decisions, you should evaluate your Business Viability ▪ Maslow’s Hierarchy of Needs refers to the

classes of desires people face, from the simplistic need for security and health to the complexity of creativity and innovation. Owners need to analyze their current state and affirm all their underlying needs are met before considering their business’ direction

The “New Normal”

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How can I evaluate my business foundation for the future?

What is the value impact to auto suppliers due to the recent pandemic? Is acquisition financing available to fund a corporate acquisition today? What are the next steps in considering either a sale or acquisition? When should I ask an expert? Can I really expect to sell my company in a market like this? What is my competition up to?

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Evaluating Your Business Foundation for the Future

▪ Before buying a home, you would have a home inspection

completed to ensure there are no underlying issues that could impact the purchase

▪ If someone was to buy your business, would they find it has a

strong foundation? Assessing Your Business Foundation

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Evaluating Your Business Foundation for the Future

▪ Evaluating your business for the future starts with understanding the

pillars of your success, and using that information to make vital decisions to generate the best outcome. As such, it is vital for business owners at all levels to assess their business viability, competitive analysis, income and M&A strategy

▪ All of these are highly subjective and dependent upon the auto sub-sector

you serve. It also allows owners to reflect on their strengths and weaknesses in the market, as opposed to those of their auto peers

Assessing Your Business Foundation

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Evaluating Your Business Foundation for the Future

▪ Business Viability is the likelihood

• f a business’ success and ability

to deliver business objectives (i.e. generating wealth)

▪ Business viability is often assessed

through what is known as the Pillars of Business Viability Model, a benchmark framework to identify components and decisions necessary for a business to survive and thrive in their industry market. The model breaks down into 6 core pillars of viability:

What is Business Viability?

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Evaluating Your Business Foundation for the Future

▪ Market Viability is the measurable market demand or receptivity to the automotive products and services you provide to your respective auto customers. Certain data can often be obtained from outside market analysts, if it is not readily available Consider:

▪ Market environment (e.g. size, sustainability, target market) ▪ Competitors ▪ Similar auto peers / product offerings / service offerings ▪ Pricing

▪ Technical Viability is the ability of your business to deliver your primary products and services. It is important to consider both the tangible and intangible attributes you deliver Consider:

▪ Range of products and services provided ▪ Availability and quality of products and services provided ▪ Geographies served vs. location of target auto customers

Market and Technical Viability

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Evaluating Your Business Foundation for the Future

▪ Business Model Viability refers to the actual business in terms of the way you deliver products and services to your target market. It is important to analyze the vulnerabilities of your service offerings and identify what makes them unique Consider:

▪ Uniqueness of the model in terms of competitive advantages ▪ Ability of competitors to replicate your product and service offerings ▪ Ability to model and adjust to others with minimal effort ▪ Ability to generate wealth

▪ Management Model Viability deals with the day-to-day management of the business and employees and how efficient the process is Consider:

▪ Identification of key professionals ▪ Employee recruitment and retention ▪ Management of intellectual property ▪ Suitable organization structure

Business Model and Management Model Viability

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Evaluating Your Business Foundation for the Future

▪ Economic and Financial Viability addresses the direct and indirect costs

• f the business to assess its profitability

Consider:

▪ Overhead and cost model as compared to peers ▪ Risks ▪ Break-even point ▪ Ability to generate economic value

▪ Exit Strategy Viability is an important part of both understanding the current value of your business and how this may fluctuate in the future, and can pinpoint important details to address Consider how to:

▪ Maximize wealth upon exit (and what you can do TODAY to impact exit value LATER) ▪ Identify potential buyers, investors/partners, and/or strategies ▪ Create capital assets ▪ Plan your ultimate exit strategy (it is NEVER TOO EARLY to begin this exercise!)

Economic and Exit Strategy Viability

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What is my competition up to?

What is the value impact to auto suppliers due to the recent pandemic? Is acquisition financing available to fund a corporate acquisition today? What are the next steps in considering either a sale or acquisition? When should I ask an expert? Can I really expect to sell my company in a market like this? How can I evaluate my business foundation for the future?

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What is my competition up to?

▪ Now that your business has been analyzed to understand its strengths and weaknesses, it’s important to do the same for your auto peers / competitors ▪ Good business owners recognize where their competition excels and falls short in order to identify strategies to promote their own ▪ This process is known as Competitive Analysis

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What is my competition up to?

▪ Who are my current competitors in the auto supply value chain?

▪ Market share? ▪ Success rate?

▪ In what market(s) are my current competitors?

▪ Niche? ▪ Mass production? ▪ Customer type?

▪ Are my competitors growing or scaling back?

▪ Why? ▪ How does this effect my business?

▪ How is my company distinguished from my competitors?

▪ Competitor weaknesses to dominate? ▪ Competitors strengths to overcome?

▪ What will I do if my competitors drop out?

▪ How will you take advantage? ▪ What will change about your business model? ▪ Who will take their place?

▪ Who would be a good partner?

▪ Other businesses to acquire as add-ons for my existing customers? ▪ Which companies complement my services? Vice versa?

Questions to ask yourself

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When should I ask an expert?

What is the value impact to auto suppliers due to the recent pandemic? Is acquisition financing available to fund a corporate acquisition today? What are the next steps in considering either a sale or acquisition? What is my competition up to? Can I really expect to sell my company in a market like this? How can I evaluate my business foundation for the future?

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When should I ask an expert? Professionals Can be of Great Service

▪ Consider hiring an outside consultant or analyst if: ▪ Market data is not readily available to you ▪ Time commitments for research and analysis are imposing on your ability to run a business ▪ Only one person is available to complete this analysis, as it increases the chance of bias or missing important factors ▪ You need assistance fully understanding your industry, market, and competitors ▪ Business Viability and Competitive Analysis are in- depth topics, even for experts. What is important is to seize the opportunity to get the best information to help your business succeed. The

• nus is on you as the business owner to choose

the best way to help your business succeed, and sometimes requires informational analysis or viewpoints experts provide

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When should I ask an expert? Addressing the Business Gaps

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▪ The answers to these questions guide how to approach your business ▪ Key tools like business viability and competitive analysis set you up to understand your business’s current situation and the related strengths and

• weaknesses. But how does a business
• vercome them?

▪ One often overlooked solution is M&A ▪ You could be buying, you could be selling, but regardless, every business needs an “always-on” M&A strategy to shore up weak points and capitalize on its strengths

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When should I ask an expert? How Can Experts Help Assess My M&A Strategy?

▪ Final Scenario: Ask the same short- and long-term questions with regard to a merger, partnership, or significant joint venture ▪ What would your business gain? ▪ What would it lose? ▪ If your company has a distinct culture, would it fit well with the newly merged entity? ▪ Is there a lack of culture, so that the personality of your company might be

• vertaken by the other company’s

culture? ▪ How would you approach the target and what are you offering? ▪ How easily could the company integrate into yours? Tip: Just jotting down notes throughout this exercise is an eye-opening experience, and may change owners’ or top management’s minds about their previous notions regarding acquiring, selling, or merging

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Can I really expect to sell my company in a market like this?

What is my competition up to? What is the value impact to auto suppliers due to the recent pandemic? Is acquisition financing available to fund a corporate acquisition today? What are the next steps in considering either a sale or acquisition? When should I ask an expert? How can I evaluate my business foundation for the future?

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Can I Expect to Sell my Company in this Market? Deals ARE Getting Done!

UHY Alone Closed 5 deals in the Past 60 Days U.S. M&A Activity Through the Crisis

Apr: 683 May: 563 June: 67

1,000 2,000 3,000 4,000 5,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2018 2019 2020

Wineman Technology, Inc. has been sold to CertTech, LLC Kennedy Industries, Inc. has been sold to Vessco Holdings, LLC an O2 Investment Partners portfolio company The Paint Stripping Division of Chemico Group has been carved out and sold to

An Undisclosed Chemicals Supplier

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Can I Expect to Sell my Company in this Market? AUTOMOTIVE Deals are Getting Done…but Activity has Slowed

Source: CapIQ

N.A. Automotive M&A Activity

§ Deals ARE getting done!

§ But activity has slowed

§ Buyers are still looking

§ Smaller buyer universe § Opportunistic / value investors

§ COVID-19 Value Discount Receding

§ Significant recovery (prior to re-opening!)

§ Owners are Preparing for Consolidation

§ Funds for acquisitions § Sale process preparation (30-45 days)

co b i U co d

2018: 284 2019: 286

10 20 30 40 50 60 70 80 90 100 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 2018 2019 2020 2021

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Can I Expect to Sell my Company in this Market?

N.A. Automotive Sub-Sector Breakdown

Source: CapIQ

Know Your Sub-Sector – And What it Means for M&A

§ Suppliers Continue to Lead the Way

§ ~50% of current deal count

§ Retail Activity Strong

§ Only sub-sector to increase as % of

deal share in Q2 2020

§ Auto-Tech has Slowed

§ For now

55% 52% 45% 44% 11% 11% 13% 12% 23% 22% 21% 28% 12% 15% 21% 16% 2018 2019 2020 Q1 2020 Q2 Auto-Tech Automotive Retail OEM's Suppliers

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Can I Expect to Sell my Company in this Market? What TYPES of Deals are Getting Done?

Pre-COVID During Pandemic Post-COVID Seller Type

Mixed (Healthy and Distressed)

Distressed (or In-Process)

Mixed (Healthy and Distressed)

Auto Sector

All Sub-Sectors Outperformers All Sub-Sectors

Buyer Type

Strategic / Consolidators

Value / Opportunistic

Mixed

Valuations

Record Levels

25%+ discounts 90%+ of Pre-COVID Levels Market Type

Seller’s Market Buyer’s Market Balanced Market

COVID Impact

[ ] Speed / Value Tradeoffs

Value Constraints (Lenders)

[ ] Structure (Earn-Outs, Seller Notes) Slower Timelines (Lenders) [ ] More / Longer Diligence [ ] Operational Look-Back [ ]

EBITDAC Adjustments Price Discovery Challenged (EBITDAC?) Transaction Type

Mixed

M&A / Strategic Alliances

Mixed

Divesting of non-core assets

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What is the value impact to auto suppliers due to the recent pandemic?

Can I really expect to sell my company in a market like this? Is acquisition financing available to fund a corporate acquisition today? What are the next steps in considering either a sale or acquisition? What is my competition up to? When should I ask an expert? How can I evaluate my business foundation for the future?

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What is the Value Impact of COVID-19?

EBITDA

§ 2019, 2020, TTM, 2021? § TTM = Wait 12 mos.? § EBITDAC?

Multiple

§ General market multiples? § Industry multiples? § Sub-Sector multiples? § Pre-Pandemic vs. Current? § Full or partial recovery?

M&A Value Drivers Enterprise Value X =

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What is the Value Impact of COVID-19?

§ Profitability vs. peers? § Margin expansion or contraction? § Platform or add-on potential? § Annual revenue growth vs. peers?

Summary Observations

§ Magnitude of Add-Backs? § Credibility of add-backs? § Potential synergies? § Temporary vs. structural impacts? § How have your customers been impacted

by COVID-19?

How Will Buyers (and Lenders, Targets) View My Numbers?

USD Millions

Sample Income Statements

2017 2018 2019 2020E Revenue 40 $ 45 $ 50 $ 40 $

Growth % 13% 11% (20%)

Cost of Sales 32 36 40 32 Gross Profit 8 $ 9 $ 10 $ 8 $

% Gross Profit 20% 20% 20% 20%

Operating Expenses 4 5 5 5 Net Income 4 $ 5 $ 5 $ 3 $ Depreciation 1 1 1 1 Calculated EBITDA 5 $ 6 $ 6 $ 4 $

Management Adjustments:

Owner's Expenses 1 1 1 1 Other Adjustments 2 2 2 2 COVID-19 Adjustment

• 2

Management Adjustments 3 3 3 5 Adjusted EBITDA 8 $ 9 $ 9 $ 9 $

% EBITDA margin 20% 19% 18% 21%

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What is the Value Impact of COVID-19? What Can I Do to Build Value Via Increased EBITDA?

§ Be pro-active in this environment § PPP loan and other government programs § Take advantage of opportunities § Pursue prospective new customers § Distracted peers? § Pursue prospective new markets and/or geographies § Reconsider cost structure § Any low hanging fruit? § Proactively look at EBITDA from a buyer’s lens § Add-backs / clean numbers § Pick all low hanging fruit § Pre-emptively complete a Quality of Earnings review

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What is the Value Impact of COVID-19? Multiples Have Been Supported by Rising Leverage

U.S. Middle Market Valuations

2.9x 4.6x 4.5x 4.3x 5.4x 6.9x 5.5x 5.6x 5.8x 5.9x 5.5x 4.0x 3.5x 4.6x 4.3x 4.4x 5.1x 4.3x 5.4x 5.5x 5.7x 6.1x 6.9x 8.1x 9.1x 8.6x 9.7x 12.0x 9.8x 10.9x 11.3x 11.5x 11.6x 0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 14.0x 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Debt/EBITDA Equity/EBITDA EV/EBITDA

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What is the Value Impact of COVID-19?

Sources: Capital IQ; LMC May 2020

A Buyer’s Lens: U.S. Sales Outlook Improving, Risks Remain

N.A. Light Vehicle Sales (MM’s)

13.2 10.4 11.6 12.8 14.5 15.6 16.4 17.4 17.5 17.2 17.2 17 12.3 13.9 14.7 1 1.2 1.5 2 4 6 8 10 12 14 16 18 20 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Milions of Vehicles US LV Sales Volume Risk

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What is the Value Impact of COVID-19?

Sources: Capital IQ; LMC May 2020

A Buyer’s Lens: N.A. Production Recovery Path

N.A. Light Vehicle Production (MM’s)

16.9 16.3 12.4 14.1 15.8 16.7 0.5 0.8 0.7 0.5 2 4 6 8 10 12 14 16 18 20 2018 2019 2020 2021 2022 2023 Production Volume Risk 31% 12%

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What is the Value Impact of COVID-19?

Source: Capital IQ

Know Your Sub-Sector – And What it Means for M&A

~5% Discount Today

Pre COVID-19 COVID-19 Lows Current Market

Auto Sub-Sector

EV / LTM EBITDA EV / LTM EBITDA Discount (vs. Pre-C19) EV / LTM EBITDA Discount (vs. Pre-C19)

Interiors and Exteriors 5.5x 4.0x 27% 5.2x 4% Powertrain 7.3x 5.3x 27% 7.1x 2% Diversified 8.8x 6.0x 31% 8.3x 6% Chassis 5.1x 3.8x 25% 4.7x 8% Automotive Retail 13.4x 10.8x 19% 14.5x (8%) OEMs 10.2x 9.0x 12% 10.5x (2%) Auto-Tech 12.8x 9.5x 26% 12.6x 1% Suppliers Other

~25% Discount (Near Complete Recovery)

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What is the Value Impact of COVID-19?

Buyer’s Value

A Buyer’s View of Value

Discounted Cash Flow Private Transactions Premiums Paid Public Companies

= Pre-COVID-19 = Current

5.5x 5.0x 7.0x 6.0x 6.5x 7.5x 8.0x 4.0x 4.5x

EBITDA Multiple: Strategic Consolidators Value / Opportunistic Buyers

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What is the Value Impact of COVID-19? How Can MBEs Avoid Value Discounts?

§ Why do buyers sometimes apply a value discount to MBEs? § Certain MBE contracts WILL be lost (lower future revenue and EBITDA) § Certain MBE contracts MAY be lost (risk and uncertainty) § Smaller ACTUAL or PERCEIVED universe of potential buyers (other MBEs) § Less ACTUAL or PERCEIVED competitive tension § What is the typical value discount buyers ascribe to MBEs? § Depends on structure of customer agreements/relationships § 0% – 20% in most cases § What strategies can be employed to minimize or avoid such value discounts? § Detailed revenue analyses § Positioning other strengths (no other competition, highest quality products) § Highlighting the strength / duration of actual or perceived “at risk” relationships § Maximizing the number of MBEs in the sale process

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Is acquisition financing available to fund a corporate acquisition today?

Can I really expect to sell my company in a market like this? What is the value impact to auto suppliers due to the recent pandemic? What are the next steps in considering either a sale or acquisition? What is my competition up to? When should I ask an expert? How can I evaluate my business foundation for the future?

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Is Acquisition Financing Currently Available?

Source: Pitchbook

U.S. Middle Market Valuations

2.9x 4.6x 4.5x 4.3x 5.4x 6.9x 5.5x 5.6x 5.8x 5.9x 5.5x 4.0x 3.5x 4.6x 4.3x 4.4x 5.1x 4.3x 5.4x 5.5x 5.7x 6.1x 6.9x 8.1x 9.1x 8.6x 9.7x 12.0x 9.8x 10.9x 11.3x 11.5x 11.6x 0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 14.0x 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Debt/EBITDA Equity/EBITDA EV/EBITDA

Leverage Will Continue to Inform Value

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Is Acquisition Financing Currently Available? What Does the Lending Environment Look Like?

Pre-COVID During Pandemic Post-COVID Lender Type

Mixed (Highly Aggressive)

Relationship / In-Process Only

Mixed (More Selective)

Leverage

3.5x Senior, 4.0x Total Cautious Approach

3.0x Senior, 3.5x Total Structure?

Not Required Cautious Approach More Common

COVID Impact Earn-Outs New Deals Challenging Seller Notes More Buyer Equity

(Lower Valuations) Unusual Delays (Black Box)

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What are the next steps in considering either a sale or acquisition?

Can I really expect to sell my company in a market like this? What is the value impact to auto suppliers due to the recent pandemic? Is acquisition financing available to fund a corporate acquisition today? What is my competition up to? When should I ask an expert? How can I evaluate my business foundation for the future?

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Next Steps in Considering Either a Sale or Acquisition What are the Next Steps?

For Potential Buyers For Potential Sellers For Capital Raising Determine Target Criteria Value Assessment Capital Structure Assessment

Launch Buy-Side Search Process Begin Prep. Process (ASAP) Prepare Financial Package Identify Targets Launch Sale Process Launch Capital Raising Process Agree to Price / Terms Sign Letter of Intent Sign Term Sheet Complete Diligence Complete Diligence Complete Diligence Close Acquisition Close Sale Close Financing 4 – 6 Months 6 – 9 Months 2 – 3 Months

Market Timing will be Critical to a Successful Transaction!

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Next Steps in Considering Either a Sale or Acquisition

Bold, well-executed M&A during downturns is an important mechanism for recovery, survival, and growth

§ COVID-19 has caused fundamental changes to the overall economy. While some shifts are temporary, other things

will never be the same, and leaders can turn to M&A to help push through these unprecedented times

§ Following crisis-induced downturns, M&A has historically generated strong returns: By repositioning

through M&A, leaders can drive resilient growth and outmaneuver market uncertainty. Firms who bought in a downturn tend to have a higher total shareholder return (over a 3 year period) than their sector average

§ Suppressed valuations are only part of the equation: Opportunities that may not have been available in an

up-market may be possible during crisis, or new openings for growth may emerge (i.e., Strategic M&A). Companies can take advantage of the environment to execute its strategic acquisition agenda and position the business to exceed industry-average growth once the economy normalizes post crisis

§ Now can be a great time to thoughtfully put M&A to work for you: Those who strategically leverage M&A as

part of a holistic response to COVID-19 over the next 1-2 years will be more likely to (i) outmaneuver market uncertainty and (ii) outperform their competitors who did not over the next several years 22% 30%

Increase from M&A during downturns

• 11%

Increase from M&A during epidemic

• utbreaks

Decrease from M&A during financial shocks

Everyone Should Have an M&A Strategy in the Current Market

Source: Capital IQ, Accenture

Shareholder Return from M&A During Downturns

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Next Steps in Considering Either a Sale or Acquisition Key Takeaways

§ Don’t Panic § Evaluate yourself as an owner and the foundation of your business § Are you a buyer – there are opportunities out there! § Are you a seller – you can get a great deal done today! § Deals ARE getting done! § Determine the right strategy for your company AND assemble the right team

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Contacts

Jeremy Falendysz

Director

jfalendysz@uhy-us.com (313) 324-7134 Brandon Beauregard

Senior Analyst

bbeauregard@uhy-us.com (313) 324-7141 Corey Massella

Managing Director

cmassella@uhy-us.com (212) 381-4660