Confidentiality is always a paramount consideration in M&A deals. Rumors spread quickly and the idea of an ownership change can lead to uncertainty and fear. Business owners don’t want to jeopardize the two most valuable company assets: employees and customers. What should the owner of a plastics manufacturer consider before alerting employees and customers to a prospective sale or M&A transaction? Below are some points to consider.
Just as a selling entity wants to ensure that its customers don’t get the wrong idea about a sale, the buyer is equally concerned. No buyer wants to spend big bucks acquiring a company, only to see a key customer leave after closing. During the due diligence phase of the sale process, a savvy buyer will take time to understand the depth of relationships, key points of contact, margins, platform details, end-market dynamics, contractual arrangements, as well as other aspects that impact the risk profile of the customers, both individually and as a group. If there are one or two dominant customers, this becomes increasingly important. It is common for a buyer to perform extensive due diligence on key customer relationships, including 3rd party surveys and direct conversations. Prevalence notwithstanding, most sellers of plastics manufacturers are uncomfortable with a buyer digging into the customer relationships and speaking with the customers prior to a deal closing. We have found however, that with the right approach, this customer communication can be an innocuous and often positive experience.
First, we recommend that any such communication occur late in the process, sometimes only a week or two before the closing date and after any and all negotiations are finalized. At this point, both buyer and seller have a high degree of certainty that the transaction will be completed and can feel confident about the future path of the business. Additionally, talking with the appropriate customer contact is important. A seasoned purchasing or engineering manager should have experience with ownership changes in the supply chain and won’t be alarmed. In most cases, it is best for the seller to lead the discussion, explain the reason for the change (retirement, estate planning, etc.), and introduce the buyer/new owner. This is an opportunity for the buyer to not only gain confidence that the key customer is committed to the relationship, but also to tout any synergies and sell an expanded set of capabilities. MBS helps buyers and sellers prepare for these discussions and in most cases the results are very favorable.
Remember: Although a change in ownership may bring uncertainty, it is often an event that can take the company to the “next level”. A new owner may bring fresh ideas, best practices, more resources, and access to capital to help the company grow. In addition to uncertainty, change also brings opportunity.
When to inform the employees about a sale process, and which ones to include are difficult questions. The answers are different for each company and depend heavily on culture and trust. In our experience, we have seen business owners take various approaches ranging from a company-wide announcement at the beginning of the sale process, to maintaining complete secrecy until the day of closing (and everything in between). There is no “one size fits all” answer here, but there are some worthy considerations we can share.
Several MBS team members have owned and subsequently sold injection molding companies. We understand that it can be as much of a personal and emotional transaction as it is a business deal. From our perspective, honesty, sincerity, and respect go a long way with employees. So, our advice for sellers is this: Inform as many of the staff members as you are comfortable with, as early in the sale process as possible. We think this is especially true for successful, going-concern plastics companies, since you as the owner can start and drive a narrative about the company’s future that is positive and exciting. Remember that rumors are likely to circulate at some point and fear of the unknown is usually more disruptive than the truth. Furthermore, we find that key employees often understand the reasons for the pending change and step-up in support. And their support throughout the sale process can be instrumental to a smooth and successful transaction.
Of course, the exact timing, the message, and the group of employees that are “in the know” will be different for every company. And you as the owner and leader will know what is “right” for your employees and what approach fits with your company’s cultural circumstances. Again, we urge sellers to err on the side of trust, openness, and respect.
Regardless of when a plastics manufacturer discloses a potential or pending sale and to whom, it is important to dispel misunderstandings and control the narrative. Employees (including key managers) are always concerned with job security. They worry that acquirers will implement cost-cutting layoffs, consolidations, or other changes that will jeopardize their livelihoods. In most cases, the intentions of the buyer are the complete opposite. Many plastics industry acquirers list employee retention as the top priority after a deal closes. In fact, lots of buyers are only interested in acquiring if there is a strong management team in place that plans on sticking around. Workforce retention has become more critical in recent years with the ultra-tight market for technical managers and labor (both skilled and unskilled) throughout the U.S. manufacturing sector. The message here is that the employee base is extremely important to a new owner in almost every case. Furthermore, an ownership change may lead to growth and new opportunities for the selling entity’s people. So, whether a seller tells employees about the sale early or late, he/she should make a strong point to dispel negative perceptions and reinforce the value of good people and its likely impact on job security and employee retention.
One last point as you strive for a win-win-win for your company, your employees, and your customers: Successful and valuable plastics manufacturers are not likely to be “stripped down”, shuttered, or relocated. Even for less valuable or struggling companies, a plant closure can be avoided, or the risk at least minimized by conducting a thoughtful and broad search for an acquirer. Identifying and soliciting acquirers that have a strategic need for the business can be crucial. Important synergies often involve capabilities, end-markets, geography, customers, or technology. And maximizing the strategic synergies between a plastics manufacturer and a potential acquirer can dramatically reduce the risk of post-closing cuts, layoffs, or other personnel changes. It can also improve the value proposition for the combined company’s customers, thus leading to higher retention rates and future growth opportunities with existing customers.
Hiring an industry-specific investment banker or M&A firm to help uncover the best acquirer almost always has a substantial and positive impact on the resulting transaction. Not only does this impact show up in the valuation, purchase price, and terms/conditions of a deal, but it ultimately improves the long-term results for the employees and customers as well. At MBS, we leverage an industry-leading network of potential acquirers for molders, plastics manufacturers, and engineered component makers. From the very early stages of an engagement, we remain focused on finding and attracting the most strategic and most qualified buyers for our clients’ companies.
by Jonathan Soucy
MBS Advisors has advised on over 100 successful M&A transactions in the plastics processing industry. MBS dealmakers draw on actual plastics company ownership experience to deliver unmatched results for clients.