Jeff Helminski’s private equity firm has an internal goal of sourcing 20 qualified deals each week.
While those efforts slowed significantly during May, June and July as a result of the COVID-19 pandemic, Helminski — managing partner at Auxo Investment Partners — said his team is now at around 98 percent of that goal year-to-date, highlighting the recent surge in deal flow across a variety of industries that’s being seen nationally.
“After being kind of right on target pre-COVID, we saw actually stronger than expected deal flow in the initial six weeks of when COVID really hit,” Helminski said. “Then, it was much slower — around half — in the May, June and July time frame. Certainly for the last 60 days, we’ve seen well above our weekly targets.”
With companies like Atlas Die LLC, Midway Rotary Die Solutions and Prestige Stamping LLC in its portfolio, Helminski’s Grand Rapids-based firm remains active in the manufacturing space. When looking at companies that are selling right now, Helminski lumps them into four categories.
The first is owners trying to exit manufacturing companies before the long-term effects of COVID become permanent within the business, dragging down the company’s appeal and value. Another segment of sellers are manufacturers that have seen a bump in sales because of COVID and are trying to capitalize on that short-term surge. A third group of sellers is looking to close on a deal before the end of the year out of concern of changes to the tax code under a potential Biden administration. The fourth category is simply the natural, ambient level of deals, including those that involve owners reaching retirement age. The fourth category of deals moved through the pandemic mostly unhindered, Helminski said.
Auxo Investment Partners entered the pandemic with four deals under letter of intent. The firm closed on two of them already and is working to close on the other two before the end of the year.
One of the completed deals was the acquisition of Indianapolis-based Precision Products Group Inc., finalized on Sept. 1. Precision Products Group is the parent company for niche manufacturers Paramount Tube and Euclid Medical Products.
Auxo’s approach reflects trends nationally. According to analysts with BizBuySell, which tracks deals nationally, transactions in April had declined 51 percent year-to-date compared to last year. That shrunk to 21 percent in July while September ended with just 5 percent fewer deals year-to-date compared to 2019.
While the initial stages of the pandemic forced some sellers to pull out of the market and even sidelined some banks, Auxo Investment Partners slowly proceeded, showing there was a way to move deals across the finish line despite the uncertainty.
“Our approach through COVID was one in which we renegotiated exclusivity periods and worked with sellers, putting us in a position where we could continue the diligence process at a very prudent pace” Helminski said. “At the same time, we were watching and evaluating the business through the summer. … Once we had enough comfort and visibility and we could see how the company was being impacted, we were able to get to a closing.”
Despite low interest rates that experts expect to stick around for the foreseeable future, Helminski said the landscape created by COVID doesn’t necessarily have to be the catalyst to buy.
“We’re long-term investors,” Helminski said. “We’re not as influenced by timeframe consideration as many of our peers. I’d say, for the right business at the right valuation, it’s always a good time to be investing.”
Winners and losers
Dustin Daniels, chair of the mergers and acquisitions practice group at Miller Johnson Attorneys, made a similar assessment as Helminski on deal flow and how volume started to pick up in late summer and hasn’t stopped.
He said the pandemic has created distortion in the market, where certain segments of the manufacturing industry have emerged as winners and losers.
“There are certain manufacturers, depending on what they do, who have experienced no drop and sometimes a pick-up in business due to distortions of COVID and how our economy is working,” Daniels said. “And, vice versa, there have been some businesses unfairly affected because their products aren’t needed as much now. We’ve really seen winners and losers.”
However, even among the perceived losers, Daniels said he hasn’t yet seen many owners selling because of the COVID stress.
“We haven’t seen a lot of distressed sellers and people who are trying to get out of businesses that maybe haven’t done well,” Daniels said. “I think that’s largely because of PPP and the liquidity provided to the market that has allowed businesses to stay. I think we may see more of that next year.”
The pandemic has served as an audition of sorts, shining a light on companies that were able to weather the pandemic and making them an attractive buy for interested parties.
“The biggest takeaway is that manufacturers that have weathered COVID well will get a positive view to potential buyers because that risk of it coming up again and performing through that — they weathered it well,” Daniels said. “They’ll be viewed as less risky.”
At a crossroads
Robert Stead, partner at Barnes & Thornburg LLP who represents company buyers and sellers, said he has noticed not only M&A activity but also a thirst for joint ventures where manufacturers can latch on to some advanced technology instead of spending the time and money to develop it on their own.
Also, in an industry that is somewhat notorious for its aging workforce, aging owners are another issue that can influence if and when it’s time to sell.
The pandemic — and the measures it will take for some manufacturers to trudge through it — may have some aging owners thinking hard about the future.
“I think they have to take a hard look at their age and just kind of their appetite for making a reinvestment in the business because I think they all understand that they’ll have to,” Stead said. “The other part of it is that they might not have an heir apparent to the business, whether it’s a family member or management team that can buy them out.
“Most of these entrepreneurs are good at this — they’re not delusional. At some point, they say ‘It’s going to be a hard and heavy lift for us and we don’t know if we have the energy for it.’ I think those are the people saying it might be time to look around and see what’s out there.”
And that’s a decision they’ll have to make relatively quickly before the potential long-term ramifications of COVID weigh the company down.
“I think if people wait too long, they’re going to be greatly disappointed in what they get for that business,” Stead said. “If they overstay their welcome, it’s going to be a problem.”