M&A’s won’t slow down in the world of manufacturing: BDO expert

M&A’s won’t slow down in the world of manufacturing: BDO expert

With inflation rising and experts discussing whether we will soon be faced with a recession, Canadian manufacturers may be concerned about what the future bodes for the rest of 2022.

Cameron Percy, Managing Director, M&A and Capital Markets at BDO Canada sat down with Canadian Manufacturing to discuss why the future is bright for Canadian manufacturers looking to grow in an uncertain market.

The BDO director was asked why he felt the M&A market would not slow down in the world of manufacturing, despite inflation and ongoing supply chain issues.

“We actually see the disintegration of supply chains as contributing to the M&A market,” says Cameron Percy. “Reshoring or onshoring isn’t happening just because things are more expensive overseas. Small batch production makes more sense to do in North America because it’s cheaper. It’s easier to secure access to raw materials, shipping and logistics routes, so it reinforces the strategic rationale for M&A’s to continue.”

BDO says that reshoring will continue for years even after inflation has been resolved and COVID-19 is even further behind us.

Some of the other factors contributing to a growing market of mergers and acquisitions include rising labour costs in other countries, and the changing relationship manufacturers have with the consumer, the BDO representative says.

He mentions that manufacturers used to sell to distributors and involve retailers before finally going to the consumer, but now, with e-commerce channels available, manufacturers are looking to consolidate their operations.

Canadian Manufacturing has reported at least five acquisitions in May of 2022, with three of them from privately-owned companies. The industries range from food manufacturing to steel and consumer products.

Cameron Percy says this shows that Canada has a huge number of privately-owned manufacturers that are active sellers in the market.

When asked if Canada’s ESG strategy and aim to become net-zero by 2050 will affect the M&A market, Cameron was forthcoming with his thoughts.

“It’s still too early to see movement in ESG related mergers or acquisitions, but the demand for electric vehicles and other cleantech manufacturing is going to be so much higher than what we currently have. We’ll have to see how Canada’s mining and strategic resources strategy grows to understand how M&A’s will fit into this.”

Cameron was also asked how manufacturers could know they were making the best decision when acquiring a small business or looking to sell a portion of their own. BDO Canada has been involved in a growing number of these transactions and was asked to provide some common pitfalls they see in their work with small manufacturers.

“Something that’s a huge problem is misalignment in terms of owner expectations and what’s going on in the market. Most business owners don’t understand raising competitive debt or market expectations; how businesses are valued in the marketplace may be vastly different from how an owner sees their own business,” he says.

Cameron went on to explain that if business owners are looking to retire immediately, it will be a problem for the new owner who may still need to have many questions answered post-purchase. He also added that determining an appropriate number for working capital can be difficult in a post-COVID-19 world. If a manufacturer can determine how much working capital they have and require, their transition as an owner or seller will be a lot smoother.

Conversely, a successful purchase or divestment is contingent on having all stakeholders on the same page, investing in people and technology, and having a “management team that knows the business and has the data in place to make a successful transition.”

With mergers and acquisitions expected to continue, manufacturers will need to be aware of the common pitfalls to avoid if they are looking to make a move, and how 2022 will be a volatile market for many manufacturers.