- Matt Bodnar
- Posts
- Mastering the Art of Deal Evaluation: A Closer Look at a Metal Fastener Business
Mastering the Art of Deal Evaluation: A Closer Look at a Metal Fastener Business
Matt Bodnar
August 22, 2024
Deal Review - Metal Fastener Business
Evaluating deals can often feel confusing and overwhelming. It can be really hard to identify quality businesses versus dogs and often honing that instinct to rapidly glance at a deal and evaluate it can make a big difference.
Today, we're diving deep into an interesting one - a metal fastener business that has a lot of strong elements at first glance. Here’s how I break down my evaluation of the deal.
Understanding the Business Landscape
This acquisition targets a distributor specializing in mission-critical fastening systems, boasting an impressive $1.1 million EBITDA. The company offers a broad spectrum of products, including structural fastenings like tension control bolts, anchor bolts, and torque wrenches, serving sectors such as construction, steel, and alternative energy.
Especially in the current macro environment, with questions about a possible recession looming, it’s crucial to assess the sectors this business serves. The listing states that the business services construction and alternative energy. Unpacking specifically how exposed the business is to each of those sectors and what the macro impact might be is critical to getting a sense of whether or the revenues are sustainable and defensible.
Evaluating The Deal
Selling into markets with strong long-term demand trajectories is really important for a healthy and successful acquisition. The listing also mentions a “large inventory” which could be leveraged as collateral for financing, making it even more attractive.
Furthermore, the company’s reputation for rapid turnaround and ownership of trademarks for in-demand products positions it as a leader in its field. If they control and own these products, even without manufacturing them directly, it could significantly enhance their value proposition beyond that of a mere distributor.
Financial Health and Projections
A glance at the financials reveals a stable trajectory with a slight upward growth from 2022 to the forecasted 2024 run rate. However, the dip in 2023 raises questions—was this due to market fluctuations or internal shifts? Understanding this can provide insights into its sustainability.
With high margins due to vertical integration and regional sourcing, alongside a 92% repeat revenue rate and 30% protected by automatic purchasing, the business seems to showcase resilience and reliability. However, it's essential to verify the gross margins and evaluate any unexpected financial adjustments that might skew the perceived profitability, and understand if the drivers of those recurring orders are sustainable.
Underwriting the Deal
Let's look at the numbers. Assuming an SBA loan as the financing structure, and valuing the business at a 5X multiple of EBITDA, this acquisition could be priced comfortably. With a calculated total deal expense of around $5.6 million, and an 80% SBA loan, the initial loan payments would equate to approximately $737,000 annually at an 11% interest rate.
Considering a conservative approach, negotiating the multiple down could enhance free cash flow significantly. For example, at a 4X multiple, free cash flow could surpass the equity investment, improving the debt service coverage ratio. The power of strategic negotiation becomes evident, potentially shifting some seller compensation to an earn-out or seller financing, freeing up cash flow and reducing the proceeds needed to close.
Key Considerations
End Markets: Are they sustainable and growing?
Financial Trajectory: Is the growth forecast realistic?
Negotiation Leverage: What’s the competitive landscape for this acquisition?
Conclusion
Hopefully this gives you a senes of how to quickly evaluate a deal and take a first pass at understanding whether its a hidden gem or worth passing over. At first glance, there’s a lot to like about this deal, but we won’t know for sure until we dig deeper and get a lot more specific about customers, end markets, demand drivers, and much more.
As always, don’t hesitate to hit reply and let me know what you think!
-Matt
P.S. It’s time to get deals
The Business Acquisition Accelerator is here.
You can unlock more deals, drive growth, and achieve success. With a team of expert deal-makers, say goodbye to deal flow challenges and embrace a future full of opportunities for your business.
See ya inside.