Manufacturers’ M&A Outlook Perseveres Through Headwinds

The manufacturing industry has had a particularly tough time navigating some of the most pressing business threats of the last few years. As Lucas Prahl and Joshua Patterson recently wrote in an article for Middle Market Growth, “the past two years have not been kind to midsized manufacturers.”

Often requiring on-site labor, manufacturers cannot always extend work-from-home benefits to staff in an effort to attract and retain talent. As crucial members of supply chains, they can be hit especially hard by ongoing delays and bottlenecks of materials shipments coming in, and finished products going out. And as digital transformation drives automation, the industry is also struggling with intensifying cybersecurity risks.

Many of these pressures are laid bare in the latest Sikich Industry Pulse: Manufacturing and Distribution report. A survey of nearly 100 manufacturing and distribution executives conducted last February made clear that the labor market, supply chain challenges and cybersecurity remain prominent headaches for the space.

Yet as Jerry Murphy, partner-in-charge of Sikich’s Manufacturing and Distribution services, tells MMG, the manufacturing sector is actually awash with optimism, signaling good news for M&A activity moving forward.

Headwinds from All Sides

Practically every industry is struggling with labor shortages, supply chain disruptions and cybersecurity threats. But Murphy noted that manufacturing businesses face a uniquely uphill battle in many of these areas.

The sector is notorious for its high turnover rates, and Murphy points to the accelerating rate of competitive wage increases that is exacerbating employee churn. And while flexibility in where and when employees work is key to retaining talent today, “obviously in a manufacturing environment, it’s not always possible to have that kind of flexibility,” Murphy adds.

Supply chain issues remain top-of-mind for many manufacturing executives as material shortages and delays have weighed heavily on the industry since the start of the pandemic, Sikich’s report found.

Finally, cybersecurity threats can often sneak up on any business, but they are especially prevalent in the manufacturing space. Nearly three-quarters of manufacturing executives reported experiencing an email phishing scam, the survey found.

Related content: The Rising Risk of Insider and Outsider Fraud: How to Protect Your Business

“Many business owners and executives don’t think that they have data, or information, or intellectual property that someone would want to steal from them,” says Murphy. “But oftentimes, these cyber threats occur not because they have intellectual property that someone’s trying to steal. It’s simply a ransomware situation where [cyber criminals] have now encrypted their data and asked for payment to release that data back to the manufacturer.”

The pipeline that manufacturers and distributors currently have is quite strong. I’m seeing business owners spending a great deal of money on new equipment and automation when they can.

Jerry Murphy

Sikich

Persevering Optimism

Despite these pain points (and many others), manufacturing executives remain optimistic, Sikich’s survey revealed. Seventy percent of respondents in February rated their optimism at a seven or higher on a scale of one-to-ten; a month later, Sikich found that 70% retained that optimism level.

But Sikich warned in its report that “this optimism may be impacted as geopolitical conflicts continue to unfold.” The war in Ukraine and rising inflation in the U.S. have likely affected manufacturers’ outlook.

Related content: Prime Your Firm for the Additive Manufacturing Wave

Even so, Murphy points to multiple factors that keep manufacturers’ optimism for growth high, particularly for those businesses that are able to tackle their most pressing challenges.

“The pipeline that manufacturers and distributors currently have is quite strong,” he says. “I’m seeing business owners spending a great deal of money on new equipment and automation when they can, to help them manage the workforce challenges that they have, and meet customer demand.”

In addition to technology investments, there are several strategies Murphy says companies in the manufacturing and distribution market should deploy to mitigate key issues.

He emphasizes the importance of providing competitive wages and benefits, offering as much flexibility as possible, and responding quickly to potential job applicants to stay competitive in the labor market. Murphy says he’s seeing more manufacturers pursue talent from the retail space, pointing to professionals’ strong customer skills and eagerness to find a new position with more flexible hours. The data suggests many manufacturers have already deployed some measures to safeguard their businesses on this front: 54% have introduced more generous labor policies and benefits packages, for instance.

Manufacturers also appear to already be prioritizing risk-mitigation strategies to remedy supply chain disruptions. More than half (54%) of survey respondents said they plan to identify alternative supplies or products to alleviate supply chain issues (and 45% said they plan to do both).

When it comes to cybersecurity, Murphy strongly encourages manufacturers to train employees, and then test them with simulated phishing attempts—or to outsource security experts to assist in the training and testing effort.

M&A Outlook

Continued growth (and optimism) will depend on how effectively manufacturers can put many of these strategies into practice. But for those growing businesses able to mitigate their largest risks, M&A outlook is positive, says Murphy.

Sikich’s survey found about 69% of executives plan to upgrade their existing facilities, while 22% plan to expand existing facilities. But to further propel the growth initiatives already in place, strategic acquisitions are “a great opportunity for manufacturers to get market share,” Murphy notes.

In addition to fueling growth through strategic acquisitions, manufacturing M&A will also support older business owners’ retirement plans, he adds.

“Maybe they don’t have an executive team or family members that can take over, and a sale is often their only choice,” says Murphy. “We’re seeing that a great deal as we’re coming out of the pandemic. It’s a great time for them to consider a sale of their business.”

Related content: Pressured By Labor Scarcities, a Broken Supply Chain and High Inflation, Manufacturers Need Help