We all would certainly agree that we are living in uncertain times created by the pandemic, the Russian invasion of Ukraine, and a variety of other worldwide issues. As investment bankers exclusively selling middle market aerospace and defense companies, we see these uncertainties translating directly into negotiations in real time between buyers and sellers —particularly in the manufacturing subsector.
Disruptions in manufacturing supply chains, whether services or materials, are reflected in delays in delivery times of raw materials and turn times of subcontracted services such as plating, non-destructive testing, and exotic surface treatments. Similarly, the costs of these raw materials and services are rising as well. In our current pipeline of deals, we are seeing examples of price increases for some materials as high as 25% to 45%. These levels of price spikes are concerning to both buyers and sellers.
To successfully navigate a sale process in this environment, sellers must prove to buyers that they are optimally managing their supply chains and costs. Examples include strengthening their planning and procurement processes to accommodate and/or qualify new suppliers or altering manufacturing planning to adjust to delayed material deliveries. In this environment, sellers should expect buyers to focus on their projections for future supply chain costs and delivery times and their impact on the sellers’ future earnings. Sellers should also plan for buyers to conduct an in-depth analysis of a company’s planning, procurement, and manufacturing process to confirm their projections.
Given the current buyer focus on supply chain risks, sellers should also expect that buyers will no longer accept past assumptions and performance as a valid argument for projected future costs and performance in their supply chains.
Have a great day everyone!