The Advantages of Selling Your Injection Molding Company to a Strategic Buyer
A strategic buyer is a corporate buyer that is already operating in the plastic molding industry. Often, the best strategic buyers for your business are the competitors, suppliers, or clients of your injection molding company.
Types of Strategic Buyers
The main goal of a strategic buyer is to acquire an injection molder whose equipment, capabilities, and customers align with the buyer’s operations to accomplish one or more strategic objectives.
Horizontal Acquisition Strategy
In the case of a “horizontal acquisition strategy,” these strategic objectives include buying an injection molder to add capacity, unique press sizes, or unique capabilities. A horizontal acquisition strategy can also include purchasing a molding operation to expand geographically if being close to a significant client or industry hub is important to the buyer. Finally, a horizontal acquisition strategy can include purchasing molds and presses needed to manufacture a proprietary line of products, rather than just making products for your customers.
Vertical Acquisition Strategy
In the case of a “vertical acquisition strategy,” the strategic buyer is looking to integrate steps in the manufacturing chain. This could include acquiring a distributor of raw materials or a company that does secondary operations like plastic fabrication, assembly, or finishing of products. For example, several large suppliers of plastics sheets, rods, and profiles have begun buying plastic molders because the margins are better in manufacturing than in distribution. Another example includes a recent transaction we closed, in which an injection molder acquired a custom mold-maker so they could be a one-stop-shop for their customers. As a final example, we sold a small injection molder to a small medical device manufacturer because the buyer wanted to manufacture their own products in-house and not rely on outsourced production.
Pros and Cons of Strategic Buyers
Unlike financial buyers who buy companies for the financial returns, strategic buyers purchase a business to operate it on a long-term basis. That typically means integrating it into their existing operations, which allows them to capture synergies and economies of scale. This usually means that a company’s margins will increase under the ownership of a strategic buyer, which is why strategic buyers are generally able to outbid a financial buyer to buy an injection molder.
Advantages of Selling to a Strategic Buyer
Most of the injection molders we’ve sold over the years have preferred to sell to a strategic buyer rather than a financial buyer. This is especially true if your injection molding operation has less than $1 million in EBITDA. Below are a few reasons why selling your injection molding business to a strategic buyer might make sense for you:
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Higher Selling Price
The adage, “value is the eye of the buyer,” holds true when selling your business. Your business will be worth more to some buyers than others. As mentioned earlier, a strategic buyer purchases a business in the same industry in which it operates. They either plan to combine the two businesses or operate them side-by-side. Either way, this allows the buyer to realize significant synergies and economies of scale from combining the two companies. These synergies lead to higher profitability, which increases the value of your business to the buyer. Therefore, strategic buyers are willing to pay more for your business than a financial buyer would.
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Faster Due Diligence
Because a strategic buyer operates in the plastic molding space, it has a solid understanding of the industry, customer requirements, and the kind of business they want to acquire. This means the sales process is faster and more efficient, and they can complete their due diligence with very few glitches. This doesn’t mean strategic buyers don’t do their due diligence. But it just means they ask better questions, understand your answers better, and don’t make mountains out of molehills. As a result, strategic buyers typically complete their due diligence much faster than a buyer unfamiliar with your industry would.
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Higher Certainty of Closing
The best offer in the world is worthless if the buyer can’t follow through and close the deal. Strategic buyers have a higher certainty of closing a deal for three reasons.
First, deals typically don’t fall apart during due diligence because the buyer understands your business. Second, strategic buyers have existing relationships with banks and lenders, so securing financing isn’t an issue. Third, strategic buyers typically have a compelling, strategic reason to make the acquisition, so in addition to a financial return, making the acquisition solves other problems for them. Combining these three reasons means there’s a very high probability of the deal going through.
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Better Opportunities for Your Management Team
Like most sellers, you want to make sure the deal is good for you, but you also want to make sure it is good for your management team and your plant workers. When you sell to a strategic buyer, they are looking to grow, which creates new opportunities for everyone on your team. This often means additional responsibilities (and raises) for your management team or extra hours or benefits for your hourly workers.
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More Stability
When you sell your injection molder to a strategic buyer, you have the comfort of knowing that they intend to own and operate it for the long haul. Unlike a private equity group that typically buys several businesses, combines them, and then sells them in 5-7 years, a strategic buyer may never sell your business. That gives you, your management team, and your workers greater assurance that your business will be in good hands long into the future.
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Better Operators
In most cases, a financial buyer makes decisions by focusing on what’s good for the buyer’s investors. That typically means doing whatever is possible to increase profits. By comparison, a strategic buyer typically makes decisions based on what is best for the key constituents of the business. That means what is best for the customers, employees, and shareholders. As a result, strategic buyers typically make decisions with a long-term perspective, not to meet quarterly or annual financial targets.
Disadvantages of Selling to a Strategic Buyer
There are only two potential disadvantages to selling your injection molding business to a strategic buyer.
- Many sellers fear that by approaching strategic buyers and allowing them to learn about your business, you may give away your competitive advantage and lose clients or key employees. The reality is that 99% of strategic buyers will respect the nondisclosure agreements they sign and will not use any information they learn about your business to compete directly against you or to poach your employees. If there are specific competitors who you don’t trust or don’t respect, tell your M&A advisor in advance so he can exclude them from the sales process.
- Many strategic buyers will be reluctant to pay you for all of the synergies and economies of scale they can generate by acquiring your injection molding operation. That makes sense, but if a strategic buyer is willing to pay you for even a portion of those synergies, it represents a premium over what a financial buyer would pay.
Conclusion
Based on the above, it is clearly in your best interest to approach strategic buyers when it comes time to sell your injection molding business. The advantages outweigh the disadvantages.
The secret to success when selling your injection molding operation is to work with a mergers & acquisitions advisor who has experience in your industry and has a database of pre-qualified strategic buyers who are interested in a business like yours.
If you’d like some help valuing your injection molding business, or would like to explore your options, I would welcome an opportunity to talk with you.
By Rich Jackim, Managing Partner at Jackim Woods & Co.
Jackim Woods & Co. is a leading mergers & acquisitions advisor focused on providing senior-level attention and flawless execution to clients in the injection molding industry.
Rich Jackim is an experienced mergers and acquisitions advisor and a retired mergers and acquisitions attorney. Rich has over 20 years of experience advising owners of middle-market companies and their boards of directors on mergers, acquisitions, and divestitures. During his career, Rich has been involved in over 70 mergers or acquisitions of middle-market companies worth over $2 billion. Rich is also the author of the critically acclaimed book, The $10 Trillion Opportunity: Designing Successful Exit Strategies for Middle Market Business Owners.
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