M & A 101: Lessons Learned from Decades of Deals – Sept/Oct 2021

Billboards and … Wire Harnesses?

Loren Smith – Blue Valley Capital

 

By Loren Smith

Why would messages on billboards that have nothing at all to do with our industry make me think of wire harness companies?

When my wife and I recently went on an extended car trip, we encountered billboard after billboard displaying nearly identical messages spelled out in giant letters: “Guaranteed offer. I’ll by your house.” Although these entreaties had no relationship to our industry, they did spark recognition of some truths about the selling process that very much relate to our industry.

This phenomenon––the widespread appeals to homeowners to respond to a ready buyer––is a clear illustration of the efficiency of the marketplace. In other words, the spread between what homebuyer A willingly puts on the table, and the valuation result that will be achieved through a competitive process also involving homebuyers B, C, D and E explains the proliferation of billboards my wife and I saw on our trip.

The individuals or corporate entities who pay for these billboards operate on a fairly simple business model: They calculate the assumed market price for a house, and then offer X percent less than that––on an attractive, immediate cash basis––yielding a group of homeowners who will jump at the immediate offer.

This is not a new business model, but the current hot housing market has increased the spread between a single buyer valuation and a valuation based on a competitive process. This substantial spread is sufficient to justify investing in multiple billboards on the interstate.

Once new owners complete a purchase transaction, they put the house on the market and take whatever time is needed to realize the true valuation and a significant profit. I can think of no clearer illustration of the value of a competitive process. If a competitive process did not regularly yield a higher price than a single offer, my wife and I would not have seen all those billboards on the interstate.

This reality has repeatedly been my experience in the wire harness industry. Many owners who come to me already have a single buyer offer in hand, but they want to verify that the offer is one they should accept. In virtually every instance, they should not.

With harness companies typically selling for four to seven times EBITDA, we are consistently able to bring prices millions of dollars above those single buyer offers to the table. The additional dollars are a result of activating the competitive process and of creating a CIM (confidential information memorandum), which can highlight many positive attributes of the company that otherwise may remain hidden.

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