Although the Corona pandemic is not completely over yet, the German mechanical engineering sector has been recording rising order intake again since spring 2021. This development is also reflected in an increasing number of company sales in the industry: The acquisition of the drive technology provider Walterscheid Powertrain by Comer Industries for € 224 million, the acquisition of Saurer Group’s winding machine business by Rieter Holding for € 300 million or the sale of Thyssenkrupp’s mining machinery division, TK Mining, to FLSmidth for € 325 million. Such exemplary transactions from the market environment as well as corresponding statistics are often used to derive sales prospects and price estimations for a company. To what extent, however, does this view with reference to mechanical engineering in German-speaking countries actually allow conclusions to be drawn about the sale of one’s own – in most cases considerably smaller – company?
Positive market situation for company sales
In fact, the larger transactions represent only a small part of the observable company sales in the mechanical engineering sector. A total of 63 companies from the DACH region were sold in the first half of 2021, of which around half were companies with less than 150 employees – further 20 % were companies with up to 350 employees. For an assessment of the general market development, an examination of the number of company sales thus also allows relevant conclusions about the SME sector, as this accounts for a large proportion of the total transactions.
On average, 129 sales of European companies and 27 from the DACH region were recorded in recent years, with the majority of company shares being sold in approx. 85% of cases. The influence of the COVID-19 pandemic becomes particularly clear when viewed from a pan-European perspective: high economic uncertainty, in many cases paired with negative effects on business figures, are not an optimal starting position for a value-maximizing sale. Therefore, numerous sales were postponed or not realized in 2020. Consequently, the significant decline in company sales is currently being followed by a recovery to pre-Covid levels. Fewer transactions were also concluded in the DACH region compared to previous years, although both the slump and the catch-up effect in 2021 were less pronounced here. Across all sectors, a significant increase in M&A activity can be observed after a restrained development in the past year. Apart from the economic recovery, this trend is also influenced by the continuing low interest rate level, which facilitates financing and boosts the market appetite for company shares as an investment option. The resulting demand thus makes sales attractive at present, as it gives sellers a favorable negotiating position.
Valuations are high – but non-transparent
In the past, this dynamic has led to high valuations, also in mechanical engineering. Since the achievable purchase price is mostly the main motivation for a sale and at the same time the most quantifiable parameter for the success of a transaction, a realistic assessment of the expected purchase price is of central importance. This is the only way to identify potential buyers, address them adequately, determine the right time to sell and ultimately achieve the best possible purchase price.
Corporate profitability is the most quantifiable factor influencing enterprise value. Therefore, in common practice the average ratio of EBITDA to enterprise value in reference transactions is used as the basis for determining the achievable purchase price. Our analysis of the price development in the mechanical engineering sector clearly shows the problems of this approach: company valuations in the mechanical engineering sector are very intransparent. For example, the transaction volume was only published for 11 of the 63 mechanical engineering transactions in DACH in H1 2021 – the EBITDA is only known for 5. For a more meaningful data basis, we therefore look at the EBITDA multiples (median) of the last quarters worldwide. This evaluation also shows extreme volatility in company valuations, which is mainly due to the lack of market transparency and the heterogeneity of the underlying companies and transactions.
Despite the insufficient data rough price indications can still be derived. For example, depending on the database, the multiples currently paid across all turnover sizes are between 12x and 15x EBITDA and thus up to 35% above the comparative values in 2019. For companies with lower turnover, a price discount of around 2x EBITDA on average can be seen. During the COVID 19 crisis, this discrepancy increased significantly, but is reducing noticeably in the current year, so that a look at current company valuations also indicates a favorable moment to sell a company.
Every company is unique – just like the M&A process
The above example illustrates that statistical considerations are not sufficient to derive an individual company value and the appropriate sales strategy. Transactions, even if they originate from the same market environment, often differ considerably and are thus difficult to compare. The charts below show the diversity of recent mechanical engineering transactions in the DACH region for the selected dimensions of investor type, investor country and target company size. This diversity also reflects in the achievable purchase prices. The purchase prices that strategic buyers or financial investors are willing to pay often differ significantly. In addition, larger companies frequently achieve higher valuations than smaller, less established ones.
Furthermore, the general economic situation and industry development play a role, as do regional factors or changes in the direct competitive situation. Typically, mechanical engineering companies with a focus on innovation trends such as holistic resource use and energy efficiency, Industry 4.0 (digitalization, automation and networking) or IoT technologies achieve higher ratings than more conventional business models. But here, too, exceptions confirm the rule. Strategic buyers are often willing to pay significantly higher valuations if the target is a particularly good fit for their own company. In order to recognize and actively exploit such opportunities, however, a look at broadly diversified reference values is not very suitable. Rather, a deep understanding of the company to be sold, its business model and an individual sales process derived therefrom are necessary to achieve the best possible marketing.
Process quality is the main value driver
While company characteristics such as profitability, size or positioning have a significant influence on the achievable purchase price, the design and implementation of the sales process is no less important, although it is more difficult to measure. The wrong approach or the approach of the wrong investors, weaknesses in the presentation of the business model, gaps in the documentation or logical breaks in the financial plan can quickly put the seller in a bad negotiating position. Even in the case of companies with actually positive sales prospects, this can decisively jeopardize the success of the transaction. However, with professional preparation and a sales process individually tailored to the particularities of the company to be sold, valuations beyond statistical reference values can be realized.
Emotions count
A company sale is largely a rational process strongly influenced by numbers, in which all parties involved have to perform. But: A company and its owners do share a common history that can span several generations. When founders part with their entrepreneurial life’s work or owners sell a company that was perhaps built up by their parents or grandparents, this is also an emotional process. Ideally there should be an outcome with which the parties involved are holistically satisfied. As Quantum Partners, we are particularly aware of the emotional level of a business sale and the trust that is placed in us. We do everything in our power to work with you to achieve the best solution for you and your company.
About Quantum Partners
Quantum Partners is a corporate finance advisor for the Industrial Technology & Automotive, Digital Media & Commerce, Software & Business Services and Fintech sectors. From its office in Munich, Quantum Partners advises clients worldwide on the sale of companies, acquisitions and financing.
Call us for a confidential exchange of ideas. We would be happy to discuss our approach, our industry expertise and references for our work with you.
Dr. Andreas Brinkrolf
Geschäftsführer
brinkrolf@quantum-partners.de
+49 89 414144 355