Everything we’ve written for www.FinishingAdnCoating.com this year has focused on educating business owners thinking about a succession plan.
John MosserWe’ve also heard from a fair number of owners on the other side of that. They have capacity to grow or a unique opportunity to acquire another business in their region or industry. They see consolidation happening around them and have the bandwidth to take on more growth.
We spend roughly three-fourths of our time representing sellers, but we also get the buy-side question frequently. This article covers some common M&A growth strategies we see people take, along with important considerations.
The next question we typically get is how someone should pay for an acquisition. Financing is a large enough topic on its own that we will cover it separately next month.
Start With the Exit in Mind
It may sound backward to start a conversation with selling, but this is where experienced acquirers begin. The most seasoned buyers have thought through their own exit strategy before they complete an acquisition. They ask not only whether a target is a good business, but also what owning it does to the company they will eventually sell, whenever that may be.
Building a professional management team can take two to three years, so it is worth starting before a target ever appears.
We often see first-time acquirers give little to no thought to this because they “just know it fits.” An acquisition changes the story of your business, so you should work through what the combined company looks like to the next owner:
- Does this make the business easier or harder to explain? An acquirer at your exit is underwriting one company with one strategy. A collection of random or seemingly disconnected businesses will likely lead to a discounted valuation.
- Does it broaden the universe of buyers who would want you, or narrow it? Adding a capability that a strategic acquirer values is different from adding one that only makes sense to you. If the universe narrows, does it also likely reduce value, or could it increase value?
- Does it change your risk profile in a way a buyer will price? Customer concentration, end market exposure, and environmental history all travel with the business you buy.
Make Sure You Have the Bandwidth
The other thing to settle early is your capacity to evaluate, execute, and integrate an acquisition successfully. If you already have difficulty stepping away for a vacation, adding a second location will take significant time, which may inadvertently create challenges at the existing operation in your absence.
Building a professional management team can take two to three years, so it is worth starting before a target ever appears. The useful part is that this is the same work that drives value in a sale, so it pays off if you don’t acquire a business.
How to Evaluate an Acquisition Target
Most often we see processes start with the financials. However, we typically start with an operational and technical review to understand what the core business actually is. We look at what processes a company runs, what it is genuinely good at, where the work comes from, and where commercial or operational synergies may exist between two companies.
Our broader principle is that every acquisition needs commercial, technical, or operational rationale behind it, and ideally in more than one way. A great deal alone is not a reason to complete a transaction. A shop with commodity work and a twenty-year-old line is cheap for reasons that do not go away when you own it. If you cannot articulate in a sentence or two why the combined business is worth more than the two pieces separately, the deal probably does not clear the bar, and certainly not when a buyer asks you the same question at your exit. The story has to make sense.
The Technical Review
We evaluate the accreditations and permits first. We want to know which approvals are tied to the facility, which to the process, and which to a specific person, because requalification can take six to eighteen months and isn't always available. We look at whether the permits transfer and how much headroom is left, since a shop running near its permitted discharge limit has less capacity to sell you than the equipment list suggests. And we look at whether the work is spec-driven and qualified or shoppable on price, because two shops with nearly identical equipment lists can be in very different businesses.
The Commercial Review
Are you selling the same services to new customers, new services to your existing customers, or new services to new customers? The first two are far more achievable than the third, and the third is where most first-time acquirers overestimate themselves. The follow-up question is whether your organization can execute it, because if the ability to quote, engineer, and stand behind a new process sits entirely inside the company you are buying, you are more dependent on retention than your model probably assumes.
Two other realities separate finishing from fabrication. CNC machines are easy to move, but a plating line is not, so the consolidation synergy that works in other industries may not practically exist.
Overlap with a customer you already serve is often an advantage rather than a problem, though be aware that potential OEMs may deliberately dual-source and rebalance rather than let one supplier carry an entire program. Also be realistic about timing to realize synergy, as cross-selling a new process to an existing customer may require qualification, which takes time and isn’t an immediate flip of the switch, so meaningful cross-sell revenue in year one is usually a modeling error.
The Operational Review
Do not assume a process can simply be run at another location. Lines and equipment are frequently tailored to a specific specification, customer, or program, and the approvals that make the work sellable are often tied to a single site. Capacity that looks interchangeable on a capabilities list may not be interchangeable in practice.
Two other realities separate finishing from fabrication. CNC machines are easy to move, but a plating line is not, so the consolidation synergy that works in other industries may not practically exist. Capabilities are also often tied to people rather than equipment. A supervisor with twenty-five years may know the chemistry in ways that are not documented anywhere.
Strategies We See
Those three lenses also help explain the acquisition strategies we’re seeing acquirers pursue.
- Same process, new geography: Operationally the most manageable because you already know how to run the process. The commercial side may vary a great deal, and it can be difficult if you are entering a new application.
- New process, same market: A move to provide a greater offering to the same customers. Commercially, this is easier because you are selling a new service to customers who already trust you.
- Value expansion: A more deliberate version of the above, and one we are seeing more of. A group acquires a larger platform in a commoditized or cyclical part of the market, then uses a series of smaller acquisitions to shift the mix toward higher value work. Each add-on brings something that would take years and real capital to build on your own, such as a proprietary process, a qualified special process, or a specific OEM approval. The platform supplies the scale and the infrastructure, and the add-ons change what the business actually is. Done well, it improves margins and reduces cyclicality at the same time, and it repositions the company for a different set of buyers at exit.
- Capacity- or customer-driven: You are turning work away, or a customer has asked you to serve a location you cannot reach today. Sometimes acquiring another business is easier and quicker than building a new operation from scratch.
- Defensive: Acquiring a smaller competitor across town, not because the business itself is compelling, but because you would rather not have someone else own it. In a fragmented market, a well-capitalized buyer taking over a modest shop nearby can turn a manageable competitor into a real problem.
- Underneath those deal types, we also see buyers organized around two broader philosophies, and they lead to very different companies over time.
- Market focused versus broadly diversified: Some acquirers are deliberately narrow and will only pursue businesses serving aerospace and defense or another end market they know well. Others take a broad holding-company approach, with less emphasis on specific criteria and more on scale and a diverse enterprise. Each strategy will appeal to a different set of future acquirers.
- Technical versus operational: Technically oriented acquirers pursue coatings businesses that develop and commercialize solutions, buying formulation knowledge, engineering capability, and intellectual property. Operationally oriented acquirers scale through systems, process discipline, geographic presence, and logistics, aiming to become a lower-cost producer that competes on price.
From Strategy to Execution
Choosing the right strategy is only part of it. Once you have a target that makes sense, the real due diligence and execution work starts. We’ve highlighted a couple of areas to keep in mind below.
Customer concentration is always a key focus in any M&A transaction. An acquisition that takes your largest customer from thirty-five percent of revenue to twenty-two percent adds real value by diversifying concentration risk.
That said, diversification for its own sake is not a strategy either. If you run a highly technical or specialized shop, buying a commoditized painting business that competes on price does not do much beyond a modest spread of risk, and it costs you something less obvious on the surface. If the growth story stops making sense, a buyer may insist on wanting only one piece, not the other. Either they discount the whole company because they know they will have to divest what doesn't fit, or they buy the part they want and leave you holding the part they didn't, with a decision to make about a business you never really wanted in the first place.
The factor that goes wrong most often is personnel, and it is rarely because the wrong people were identified. In due diligence, everyone says the right things.
Where concentration is structural because the niche is narrow, and in specialty applications it often is, the work is demonstrating durability rather than diversifying. Process qualifications that took years to earn, engineering involvement on the customer’s side, capital tied to specific programs, and production locations that complement the customer’s footprint all make a relationship hard to displace.
Regardless of the situation, customer concentration is always a topic to watch, as any lender or eventual acquirer will evaluate it early.
Diligence Items Inexperienced Acquirers Underweight
Four important items we see first-time acquirers routinely miss.
The environmental chain, not just the Phase I: In this industry, the exposure can sit anywhere in the property’s history and throughout the disposal chain. Evaluate any exposure early and determine the appropriate structure to protect from pre-existing liabilities.
Permit headroom: Worth checking early, because it can invalidate the entire growth case before you spend money on anything else.
Deferred maintenance capex: Walk the plant with someone who knows the equipment. You want to be confident there isn’t $1–2 million in catch-up expense needed to sustain the operation you are acquiring. Similarly, if you spend significant maintenance capex each year to keep the operation going, consider whether it should be underwritten as an operating expense.
The wage gap: For smaller shops, it’s not uncommon for below-market wages to be held together by loyalty to an owner who is now leaving. After closing, you don’t want to be surprised by a significant compensation increase across the board to retain people who were historically underpaid.
Don’t Put Off Integration
Rushing integration, or arriving at closing without a detailed plan, is unfortunately a common mistake we see post-close. The work of combining two shops gets treated as something to figure out once the wire clears, and by then you are making time-pressured decisions that affect people who are already anxious.
The factor that goes wrong most often is personnel, and it is rarely because the wrong people were identified. In due diligence, everyone says the right things. The breakdown comes afterward when communication is limited, inconsistent, or late. Employees at the acquired company hear nothing for weeks, fill the silence themselves, and start taking calls from competitors.
The single most sensitive area is pay and benefits. If paychecks are late, deductions change without explanation, or a health plan transition is handled poorly, you have created a trust problem that can take years to resolve in a private company. It is worth over-investing in getting that right, including running parallel systems longer than feels efficient.
A few principles that hold up across the transactions we see:
- Have the integration plan finished before closing, with named owners and dates, not after
- Communicate early, in person, and more often than feels necessary, including when the answer is that nothing has been decided yet.
- Prioritize HR and handle pay, benefits, and PTO cleanly, and confirm it with every employee.
- Let the permit and approval questions drive the deal structure. We have seen structure chosen entirely for tax and liability reasons with nobody asking whether a key permit transfers, and that is how a buyer ends up owning a shop they cannot run.
Know What You Are Building Toward
Growth through acquisition can be one of the more effective ways to build value in this industry, and the owners who do it well tend to have a few things in common. They started with a clear view of where the business is ultimately headed and who might eventually own it. They could explain the commercial, technical, or operational logic behind each deal in a way that made sense to someone outside their own company. And they treated integration, particularly the people side of it, as the part of the transaction that actually determines the outcome.
If you are considering a first acquisition, what do you want the combined business to look like in five or ten years?
John Mosser is Managing Director at Triscend Partners. For questions about this topic or to discuss your specific situation, contact John Mosser at john@triscendpartners.com.
