When selling a business during periods of inflation, sellers must be prepared and equipped to address buyers’ concerns about future margin erosion due to rising costs.
Whether you are a manufacturer or a service provider, the entire supply chain in the aerospace and defense industry is being impacted by inflation right now. Material prices are escalating, overhead costs are increasing, and labor is both in short supply and costing more.
Sellers must not only take steps to prevent margin erosion, but they must also convince buyers that inflation will not erode margins in the future. New methods of contracting represent a leading field where we are seeing sellers have great success addressing buyers’ concerns about inflation. These new contracting methods include: (i) blanket customer price escalations, (ii) time-phased customer price escalations, (iii) PPI / specific cost-based contracting language, (iv) shortening the open quote expiration periods, and (v) price-in-effect purchase orders.
As we have said frequently in past Deal Notes: buyers rely upon sellers’ projections to drive their due diligence. In the end, after exhaustive investigation, a buyer will determine if they find the seller’s projections to be credible. If the determination is favorable, then a sale is likely to be consummated. If the findings are unfavorable, then either (a) there will be a substantial price reduction or (b) there will be no sale. As we keep repeating, the seller’s financial projections are going to be vigorously challenged by the buyer. It is then vital, given the current inflationary environment, that the seller be able to explain how the business has, and will, mitigate the risk of price erosion in the future due to inflation.
Have a great day everyone!