Electrical Wholesale Industry Acquisitions to Continue

Valuations Exceed the Average for all Sectors

Summary: The Electrical Wholesaling industry is highly fragmented and set for increased mergers and acquisitions as companies look for continued growth.  Companies of all sizes will be potential targets especially those with desirable product lines and advantageous location.

Electrical Wholesaling is an industry that serves the electrical equipment and wiring needs of the industrial, construction, utility and commercial, institutional and governmental (CIG) markets.  Primary products categories include general supplies, wire, cable and conduit, communications and security, electrical distribution and controls, lighting and sustainability, automation, controls and motors. 

A large fragmented industry:

The industry is highly fragmented and includes thousands of small regional and locally based, privately owned companies.  For example, the top 5 players include Sonepar NA, WESCO, Graybar, Anixter and Rexel NA.  Collectively the top 5 are estimated to account for $34B of revenue and 33% of the $104B North American market.  Moreover, the top 200 players are estimated to account for $64B and only 61% market share. This leaves hundreds of small and regional companies that account for the remaining 39% share of the market.

Acquisitions as a growth strategy:

Most analysts characterize the industry as in the early stages of consolidation.  Electrical Wholesaling magazine maintains a database that includes more than 500 acquisitions since the 1990's.  Many companies have used acquisitions as a growth strategy however, 9 of the largest companies have implemented such a strategy on a grand scale and in fact have completed 231 (46%) of these transactions.  A closer examination indicates that electrical distributors use acquisitions in their strategic growth strategies in many different ways as follows:

• Establish a geographic presence in an adjacent market:  For example, Graybar Electric used this strategy to acquire Cape Electrical in 2016 to add locations along the Mississippi and Ohio river.
• Acquire a multi-branch distributor to expand into a new region:  Most recently Mayer Electric expanded from its base in the Southeast/Texas to acquire The Hite Co. in Altoona, PA.
• Use an acquired company as a platform for additional acquisitions:  Sonepar started its North American acquisition strategy in 1984.  Twenty-three years later the market leader has $9.6B in revenue and 988 locations, most acquired through acquisition.  Along the way the company frequently used a hub-and-spoke acquisition strategy as platforms for further expansion in various regions.
• Leverage a sought-after key product line:  This issue is quite common with Rockwell Automation distributors.  Examples include Rexel's 2016 acquisition of Brohl & Appell and CED's purchase of Tri State Supply. 
• Establish or build out a presence in a new product specialty or expertise:  A good example is Rexel's 2012 purchase of Munro Distributing because of its expertise in working with ESCOs and expertise in lighting retrofits.
• Increase strength of supplier relationships:  Larger distributors have more buying power and options when dealing with manufacturers.

Wide range in valuations:

Valuations used to determine the selling price for such acquisitions can vary widely by industry and within industry segments.  The size of the target company being acquired as well as the strategic nature of the acquisition like those listed above can have a significant impact on valuation multiples. 

The chart below includes a sampling of electrical wholesaling transactions from companies sold between   1995 to 2018.  The data includes an EBITDA range of $100,000 to $99,000,000.

Data:  Businesses sold between 1995 and 2018 with revenue between $1 million and $969 million and EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) between $145,000 and $99,329,000.  Source Business Valuation Resources Deal Stats database.

Example value calculation using Median Multiple:  Electrical wholesaler with $2 Mil of EBITDA may have a value of $11.8 Mil based on the median multiple calculation ($2.0 Mil x 5.9).  Actual offers from buyers would be expected to fall within the 25-75 percentile ranges of $9.8 Mil ($2.0 Mil x 4.9) and $17.4 million ($2.0 Mil x 8.7).  Higher EBITDA businesses with higher qualitative and strategic factors would be expected to generate the highest offers.

Note:  Current PRICE/EBITDA median across all sectors is 4.4 (BVR Deal Stats database)

Growth forecast:

Over the past 50 years average annual growth in the electrical distribution industry was 6%.  However, the period of 2008-2017 (since the great recession) industry sales averaged just 1.1% annual growth.  Note there was a 2% downturn in 2016, followed by a 6.3% rebound in 2017.  Herm Isenstein of Distributor Information Services Corp. (DISC), the electrical industry's leading economist is projecting 2018 growth to come in at 5.8%, with 3.5% growth forecast in 2019 which is then expected to continue into 2020/2021.

Do acquisitions work:

With only 3 public companies operating in the segment, detailed information post acquisition is sometimes difficult to obtain.  WESCO is one of those public companies that has actively embraced acquisitions as a part of their growth strategy and has benefited by implementing a highly selective acquisition strategy.  Targets must have a strategy consistent with their own, a rate of return greater than WESCO, a projected accretive result in the first year post acquisition and margins higher than WESCO.  The company tracks and reports results to shareholders.  Those results outline 15 acquisitions since 2010 with a cumulative first year gain in revenue of $2B in 2016.  Wesco's experience mirrors BMI' s observations in that acquisitions work when done properly.

Summary:  Acquisitions have long been part of the highly fragmented Electrical Wholesale Industry.  For the past 20 years the five largest companies have actively and methodically utilized acquisitions to drive a robust growth strategy and now account for roughly one-third of the total North American market.  However, independent, family-run businesses still maintain a dominant two-thirds share.   That share is expected to slowing decline in the foreseeable future.  The combination of persisting fragmentation  along with low forecasted industry growth rates signal that "growth by acquisitions" will continue to be a big part of the Electrical Wholesale Industry in the years ahead.

Electrical Wholesale Industry Acquisitions to Continue originated at Business Markets Inc.

Reducing Environmental Risk

Preparing to Sell Your Business:  Tips For Reducing Environmental Risk

(Including Information from BSTI Environmental Consultants)

Environmental issues can derail a transaction and seriously impact value unless business owners take a proactive approach.  Buyers and their lenders will conduct environmental due diligence so it is imperative that sellers plan ahead and get their environmental house in order.  Below are tips for sellers:

• Get ahead of environmental issues by conducting an internal audit. 
• Make environmental part of your exit strategy.
• Keep your records organized, complete and accessible.
• Assemble your prior environmental documents, reports, assessments, permits etc.
• Designate one person to be in charge of managing the environmental information.
• Have an attorney knowledgeable in environmental issues on your team and include them from the outset.
• Do not expect that your prior Phase I Assessment will be accepted by buyers.   Also keep in mind lenders will require a new Phase I by a firm they select.  Different consultants and environmental attorneys may draw different conclusions.
• If there are legacy environmental issues consider whether you want to manage these post-closing or transfer to the buyer.  If transferred be prepared to set aside funds in an escrow or take a reduction in price.
• Consider brownfield site buyers such as Environmental Liability Transfer Inc.  These groups can help facilitate a transaction for well positioned real estate.
• For properties with well defined post-Phase II issues, environmental insurance is a possibility.
• Ensure sufficient environmental language is in the purchase agreement documents to include due diligence, access agreements, data security, cost sharing arrangements, specific end-points, regulatory thresholds etc.

Do not be deterred by environmental issues when considering your exit plans.  Buyers of established businesses with historic industrial activity are not expecting pristine conditions. But preparation and having a qualified team can make a transaction much smoother for both buyer and seller and result on better value.

This article is based in part on information provided by BSTI of Philadelphia PA.   BTSI has an excellent article detailing more of these issues: https://www.bstiweb.com/ten-insider-tips-reducing-environmental-risk-commercial-real-estate-transactions/  BSTI( www.bstiweb.com )is a provider of environmental assessment, remediation and consulting services to industrial and commercial clients, legal counsel and real estate stake-holders.

Reducing Environmental Risk is property of http://www.BMIMergers.com

BMI’s M&A Advisor and Electronics Industry Specialist Obtains the Series 79

March 19, 2019 - (Philadelphia, PA) - BMI Mergers & Acquisitions, a M&A and business brokerage firm, announced Charles Fay successfully completed the exams and requirements for the FINRA series 79 and 63. This brings an additional level of professionalism and protection for his clients and customers. Charles will handle securities transactions as a registered representative of StillPoint Capital, LLC, a FINRA Member firm and registered broker-dealer. Charles spent more than 30 years working with Fortune 200 companies in the high technology electronics industry. He was notably the key contributor that rebuilt and globalized a $1 billion business as well as seamlessly integrating numerous strategic acquisitions for Arrow Electronics. Charles brings a unique set of skills and extensive knowledge of the electronics industry to his clients. He holds a Bachelor of Science in Electrical Engineering from Case Western Reserve University as well as a Master of Science in Computer & Information Science from the University of Pennsylvania. Tom Kerchner, Managing Director of BMI had this to say, "With this accomplishment, Charles helps BMI continue its tradition of exceeding industry norms when it comes to licensing and certifications. This further enhances Charles' credentials as he continues to work with small and mid-size firms in the electronics industry."

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BMI's M&A Advisor and Electronics Industry Specialist Obtains the Series 79 was originally published on BMIMergers.com

Methods of Valuation when Selling a Business

Valuing a privately held business can seem daunting when you consider all of the possible methods of company valuation. Outlined below we briefly discuss the most common types and which are most appropriate when selling a business in the market.

1. Asset Value

   Usually only applies where the asset values exceed values based on income. Examples are companies that are either struggling financially or have an excess of assets relative to the revenue generation of the business. Rarely used in valuing a business for sale. Even struggling businesses sometimes have goodwill or other intangible assets that a buyer may pay extra. Assets considered will include equipment, fixtures, inventory, accounts receivable, open orders, customer lists, patents and other intellectual property.

2. Discounted Cash Flow

   a) Discounted cash flow(DCF) is often used by professional buyers when determining the amount they want to pay for a business. Basically this calculation is the present value of future cash flows of the business. Many factors go into the calculation and each of the factors requires making assumptions and judgements. Most importantly there are three data points to be decided: i) Cash flow for each year into the future – usually 5 – 10 years. ii) Discount rate used to value future cash flows in todays value. The rate includes several components including a risk free rate plus add-ons to account for the risk of the particular investment. A few percentage points in either direction with the discount rate can have a large impact on the calculated value. iii) Future sale value – what will the business sell for at the end of the time horizon. b) Small and middle market business valuations based on DCF should be carefully scrutinized and because of the various assumptions made in the calculation should be considered in conjunction with comparable transactions and the multiple of ebitda method below.

3. Multiple of EBITDA

   a) EBITDA is Earnings before Interest, Taxes, Depreciation and Amortization. The most common form of valuation in the middle market of M&A, particularly for businesses with at least $500,000 of EBITDA. Using transaction data relevant to the business and industry a multiple, say 4x is applied to the adjusted ebitda to come up with a price. The EBITDA multiple method is sometimes criticized because it does not consider taxes and capital expenditures. It is nonetheless an important method to use as a starting point for buyers, sellers and advisors. Different buyers will have different tax structures and investment requirements so the ebitda multiple method is a useful tool for business owners to determine probable offers to be received from buyers. b) Multiple of EBITDA should be looked as a guide for possible offers from buyers rather than a specific numbers.  As you can see from the chart of transaction multiples for the construction industry, multiples vary widely between the industry segments and even within each segment.  Industry professionals experienced in the market can help fine

4. Multiple of SDE

   a) Similar to Multiple of EBITDA, but SDE which stands for Sellers Discretionary Earnings, includes the owners normalized salary and benefits. This is most often used in small business transactions where the owner is the key manager and the buyer is likely to be an individual who will replace the owner. Multiples of SDE tend to be lower than multiples of EBITDA but the resulting value could be the same for many businesses.

5. Multiple of Revenue

   a) Multiples of revenue are often quoted but almost never used by professional buyers except in some unique circumstances. Buyers and lenders are interested in cash flow much more than revenue. For instance, a manufacturer with $5 million in sales and $1 million of gross profit is going to be of much lower value than a company with $5 million in sales and $2.5 million of gross profit, yet a multiple of revenue calculation will show both companies as being of equal value. Therefore this method has little accuracy and value for business sellers.

Valuation of a business includes financial calculations, but other factors are also important including number and type of potential buyers, terms, and the unique characteristics of your business. In business sales transactions, typically a method such as EBITDA multiple is used to determine a probable range of offers and the qualitative factors(management, customers etc.) are considered to determine where in that range the business is likely to fall. See more on our Business Valuations page.

The blog post, Methods of Valuation when Selling a Business, is republished from Business Markets Inc.

Construction Industry Multiples

EBITDA multiples are sometimes used to determine approximate business value in a sale transaction.  Multiples can vary widely by industry and within industry segments.  Following is data for a sampling of construction industry transactions from companies sold between 2010 and September 2018 with reported EBITDA in a range of $250,000 to $2 million. Data: Businesses sold between 2010 and September 2018 with EBITDA(Earnings before Interest, Taxes, Depreciation and Amortization) between $250,000 and $2,000,000. Source: BVResources Deal Stats database. Example value calculation using Median Multiple: Electrical Contractor with $450,000 of ebitda may have a value of $1.8 million based on the median multiple calculation($450,000 x 4.0). Actual offers from buyers would be expected to fall within the 25-75 percentile ranges or $1.125 million($450,000 x 2.5) and $2.475 million($450,000 x 5.5). Higher EBITDA businesses with high qualitative factors would be expected to generate the highest offers.

The following blog post Construction Industry Multiples was originally seen on http://www.BMIMergers.com/

Paul Cocco, Snack Foods Industry Veteran Joins BMI Mergers & Acquisitions

September 10, 2018 - (Philadelphia, PA) - BMI Mergers & Acquisitions announced the addition of Paul Cocco to its team. Mr. Cocco brings 25 years of Fortune 200 experience in the consumer packaged goods industry.  He also owned a battery sales, distribution and recycling company. Mr. Cocco held various sales and marketing leadership positions at The Hershey Company where his general management talents were put to work directing Sales, Marketing and Business Planning departments. He has extensive experience with top retailers and distributors across consumer products channels and represented The Hershey Company on several acquisition teams, including the group which purchased Mauna Loa Macadamia nuts for $130M. Paul Cocco began his relationship with BMI Mergers & Acquisitions as a business buyer and then as a seller. He and his wife transformed a struggling operation to Pennsylvania's highest volume battery recycler in just six years by streamlining the supply chain, developing strategic buying and selling relationships and executing a product branding strategy which contributed to the company quadrupling in value. Tom Kerchner, Managing Director of BMI commented, "Paul's combination of Fortune 500 sales and marketing experience with small business operational success will be a great partner to BMI and our clients who want to buy, sell or merge a business." Paul has a Bachelor of Business Administration degree in Marketing & Entrepreneurship from Baylor University. He works out of BMI's Harrisburg office and resides in Hershey, Pennsylvania with his wife and two children.

Paul Cocco, Snack Foods Industry Veteran Joins BMI Mergers & Acquisitions is property of Business Markets Inc.

M&A Professionals Declare This One of the Best Times to Sell a Business

 (Philadelphia, Pennsylvania) September 8, 2018 – In a national survey of 277 M&A Advisors and Business Brokers, a majority declared this to be one of the best times to sell a business.  According to the quarterly Market Pulse Report published by the International Business Brokers Association(IBBA), M&A Source, and the Pepperdine Private Capital Market Project.  76% of respondents indicated now was one of the best times to sell in the past 5 – 10 or more years.  21% of advisors declared this to be the best time they have ever seen.  "The current environment means there  may never be a better time to sell your business" said Craig Everett,  PhD, Director of the Pepperdine Private Capital Markets Project.   "Capital is readily available from lenders, private equity firms, and family offices, and existing companies have record  cash sitting on the sidelines.  Interest rates are still relatively low, the economy is going strong with an estimated 4.3% GDP growth in Q2 2018, and business  confidence remains  high. Well-run companies are doing well in the M&A market right now."  Another driver for strategic buyers is that the strong economy is creating labor shortages which impact companies ability to grow organically.  The result is more companies pursuing acquisitions to grow. Other highlights of the Report:

• Strategic Buyers(Competitors, Industry Participants) account for a minority of buyers at all transaction value levels at 33% of all buyers.

• Time to Close from LOI date to Close Date – Percent that took at least 4 months:
  • $1-$2 million transaction value – 25%
  • $2-$5 million transaction value – 40%
  • $5-$50 million – 57%
  • The median for all deals $1-$50 million was 3.5 months.

• Time to Close from Engagement date to Close Date – Percent that took at least 12 months:
  • $1-$2 million transaction value – 39%
  • $2-$5 million transaction value – 50%
  • $5-$50 million – 49%
  • The median for all deals $1 - $50 million was 10 months.

• Earnouts are not popular with only 2% of deals reported containing earnouts.

• Median transaction value for deals between $1 and $5 million was 3.7x EBITDA. This is comparable to the results from one year ago in Q2 2017.  Larger deals showed an increase from 5.4 to 5.9x however the small sample size could be affecting this calculation.

• No major change in deal values from Q2 2017 but the sentiment among advisors is there will be a marked increase in businesses coming onto the market. Last year only 21% of advisors projected an increase while now 52% now predict an increase in businesses coming onto the market.  For now they see steady valuations as the reasons noted above will support valuations even if the supply of businesses for sale increases over the next year.

• Only 27% of sellers consulted with a business broker or M&A Advisor when planning for retirement. When an exit plan calls for selling the business these professionals may be in the best position to advise on market valuations, likely terms, employment or transition income, retained equity options and other deal options.  Dave Clark, Managing Director of BMI Mergers & Acquisitions commented, "Some of our most successful clients and transactions were the result of annual conversations owners had with BMI advisors 2, 3 and sometimes 5 years before finally going to market."

Obtain The Full Report here: IBBA_Q2_2018 About the Market Pulse Report The quarterly IBBA and M&A Source Market Pulse Survey was created to gain an accurate understanding of the market conditions  for businesses being sold with deal values up to $50 million.  The national survey was conducted with the intent of providing a valuable resource to business owners and their advisors. About International Business Brokers Association (IBBA) and the M&A Source Founded in 1991, The M&A Source promotes professional development of merger and acquisition professionals so that they may better serve their clients' needs, and maximize public awareness of professional intermediary services available for middle market merger and acquisition transactions. For more information about the M&A Source visit  www.masource.org.  Founded in 1983, IBBA is the largest non-profit association specifically formed to meet the needs of people and firms engaged in various aspects of business brokerage and mergers and acquisitions. The IBBA is a trade association of business brokers providing education, conferences, professional designations, and networking opportunities. For more information about IBBA, visit the website at  www.ibba.org  

Similar posts can be read at: Business Markets Inc.