So, my son finally left for camp with a huge smile on his face despite all the tears emanating from the rest of us. He was so brave! And notice how I use the word finally. It was time for him to go. He went. The rest is history and now I feel a lot lighter with this weight off me. Now, let’s pray together for 46 1/2 more days of smooth sailing. Next subject!
Over the 87 years of being in business, Jaftex has had nearly 20 companies under its umbrella and almost all of the companies were purchased from someone else. I wanted to discuss the manner in which most of these companies were acquired because I thought it would be interesting for you to learn. But also, I think we are on the precipice of a lot of M&A activity about to occur in our industry. Yes, this is me predicting the future without any inside scoop. The reason being is that companies can gain more efficiencies by purchasing others. Basically, the total sales volume can increase and the overhead (expenses) on the combined company can decrease due to redundancies and other cost cutting measures. For example, you don’t need 2 book keepers, secretaries, offices, warehouses, etc. There is also purchasing power when you buy more stuff, so that too can result in lower costs and higher profits.
Many of the companies that we purchased had been struggling before we purchased them. In most cases, the owners were very relieved to have the life line. Typically, the purchases were inventory based. Essentially, we and the seller evaluated the inventory and valued it based on the original costs and age of the fabric. This is a simplistic description as other factors did play in to it, but I don’t want to bore you with the minutiae. We then buy the fabric. In addition, we take on all the essential employees that we need to maintain the continuity of the business. We also take on a portion (or all) of the obligations that exist including the sales. So maybe we take on paying the insurance for the employees, but not the rent for the office since we don’t need the space anymore. We like to think that we can be value-added to the company and turn it around by implementing methods and processes that have worked for us so well over the years. It usually takes a year or so for us to get the company running on all cylinders. We have been fortunate to mostly have asset purchase deals, but not all deals are the same.
Not all companies are purchased while they are in trouble. Some are purchased at a time when the company is doing great and we wouldn’t be afraid to pay up for the right company if the opportunity arose. In this case, the owner may want to sell out because he or she wants to retire, go in to another business, try to get out of the business at the top and/or maximize profits and the list goes on. In this scenario, a simple inventory purchase won’t work. This person is thinking, show me the money! The owner will want money for his or her good will, the brand name, future booked sales, websites and so many other things that took him or her time to build and perfect. The buyer may want a multiple of earnings. For example if the company earned $1 million last year, they may want to be bought for $5 million plus the cost of the inventory. That would be 5 times earnings and the buyer would be paying up.
The thing is, what multiple would you use to evaluate a textile company? It isn’t a biotech company or tech company where the multiples could be 15% or even higher based on the huge growth potential. Dream on if you think you are getting 15% or even 5% in the textile industry. For this industry, I would say low single digits would be more reasonable.
It’s not like it isn’t easy to go out and start up your own fabric company. There are so few barriers to entry. Case in point, Sue & John Linam, formerly of Fabric-Quilt, are now starting a brand new fabric business. So why would someone pay a double-digit multiple? If you are thinking about selling and are fantasizing about double-digit multiples, I would start thinking again and fast because it isn’t going to happen. Once you start merger and acquisition discussions, you will learn very fast what someone is willing to pay and I would guess that the number is under 5%.
Hopefully one of these days I will have a new deal to report to you about. In the meantime, let’s see if my prediction about M&A comes to fruition.
Happy Summer Scott