Schmitt: More than one way to sell your business

I'm a veteran Michelin guy. After spending 33 years on product research and development and the commercial tire business, I shifted gears last year and made the switch to investment banking.

Since I helped build Michelin's retread business from the ground up, I have a soft spot for business owners in that space and meet with them often in my current role. I see the retreading business through a new lens as retreaders and commercial tire dealers journey through the unforeseen as a result of the global pandemic.

Until March, our economy was strong with merger-and-acquisition (M&A) activity rising. Now these transactions likely are to accelerate, and independent companies shouldn't miss out by undervaluing their operations or overlooking financing options.

The reality is that the playing field levels more every day, and companies no longer can compete only on quality and service. They have to grow — which means independents have leverage and options.

It's important for any prospective seller to know the value of the organization and what his or her long-term objectives might be.

Much of the M&A activity in recent years has been through one-on-one negotiations between dealers. That method may not optimize value for the sellers, especially since valuation methodologies are left to officers and accountants of the buying and selling dealers.

There will be new opportunities for healthy businesses to acquire smaller companies facing difficulties in the post-pandemic economy.

Or, you may be poised to sell your healthy business to retire but are concerned it may be undervalued due to current economic conditions.

Conversely, your business may be struggling as a result of the pandemic. One option is an investment-banking firm that understands your industry and can help with restructuring plans to survive the downturn.

If your business has remained stable through the turbulence, the investment banker has access to investors eager to take a stake in or buy profitable companies at a good premium.

Investment-banking firms can bring alternative options to dealers not available through traditional bank financing. For example, the following are some common scenarios in the industry now.

Say Company X is a $40 million/year tire business, and the patriarch of its competitor in a neighboring state, Company Y, is retiring. X wants to acquire Y to expand its footprint, but X doesn't fit the profile for traditional financing.

An investment-banking firm can find Company X access to capital beyond what banks can offer, in order to close on that acquisition.

In a situation like this, Company A CEO may be close to retiring and wants to put some money away to secure a comfortable nest egg.

But he/she still enjoys the business and wants to be active for now. Through an investment-banking firm's network of investors, the firm can offer the owner transaction structures that allow for the sale of a percentage of the business while maintaining the CEO's active stake in the upside of business growth.

When that happens, the CEO sells a percentage and invests that money for eventual retirement.

The private-equity group that backed the company typically wants to infuse more money to increase growth (acquisitions or expansion), so it can sell the business for much more than it invested.

Ultimately, everybody wins — the private equity helped grow the business for a larger upside on the sale of the remainder of the business.

If an owner's goals are to hand over the keys and walk away, it's important to know that as well.

A good investment banker will explore the owner's goals beforehand and tailor marketing efforts accordingly, so in this scenario, the banker is pitching only buyers that would be a good fit for a total takeover of the business.

The North American tire industry has seen major changes in the last 20 years. After World War II, many commercial tire businesses were established as family-run operations, including many that also invested in retreading operations.

Until 1998, independent retreading suppliers represented 80% of the market, but once the "Big Three" tire manufacturers (Bridgestone, Michelin, Goodyear) got into the retreading game, that dramatically shifted — and by 2008, the Big Three controlled an estimated 96% of the retreading business.

That, in turn, influenced how independent dealers sold new tire brands. The distribution alignment driven by big tire manufacturers via retreading also contributed to consolidation in the dealer network.

Now the independents that are left, who are still running great businesses, could be very desirable acquisition targets for the right buyer.

Often, these businesses are in the hands of the third generation, and the family structure may have run its course. Many principals are no longer in it for the long haul and want to focus on other pursuits and may be looking for options.

And ultimately, the folks who built the business should have options when they choose to leave it.

Henry Schmitt is managing director at Skyway Capital Markets, focusing on the commercial tire, light manufacturing and middle market industrial businesses, assisting with M&A activities, growth and market consolidation. Mr. Schmitt spent three decades at Michelin. In 1997, he was part of a team that helped Michelin enter the commercial retreading business in North America, called Michelin Retread Technologies Inc. (MRTI). Mr. Schmitt was president of MRTI from 2008-13, then was manufacturing and technical director from 2013-16 for Michelin Tweel Technologies, which developed the world's first commercially available airless radial tire.