Over the past 25+ years, we have been financial advisors to companies with a myriad of legal structures. Simple examples are a family that owns the real estate of a manufacturing company. More complex examples we have seen include numerous companies selling goods and services to each other, under one group brand name and one set of executive management.
If you are a multibillion-dollar business and you have a dozen unique divisions with hundreds of millions of dollars of revenue, then a complex structure can make a lot of sense. But when one owner has a business with $75 million in revenue, coming from 5 different legal entities, all doing basically the same thing for the same customers, then your complex structure will cause you to lose substantial value when you sell your business. How much value – we estimate that every time we have sold a business with unnecessary legal complexity, our client has lost 10-20%. In the case of a $50 million business that could be as much as $10 million.
We have seen examples where one owner had a machine shop, a processing business, a separate real estate company, and another entity that owned some of their intellectual property. While that structure may have made sense to the owner for other reasons, in regard to M&A, structures like these are almost always a big mistake for middle market A&D companies.
The primary reason why these complex structures cause a reduction to the sale prices for your business is that buyers of companies in the middle market of A&D do not like this. They find these structures to be obtuse and lacking transparency, even if the parent company has audited financials. Issues like intercompany accounting and transfer pricing make their due diligence far more complicated and always give them concern. Buyers value transparency and clarity.
If you have created a complex legal structure for your middle market aerospace and defense company, please keep in mind that it could cost you up to 20% when you sell. If the benefits outweigh the potential costs, then stick with your structure. However, before you decide to sell your business, you should consider simplifying your structure, to avoid a discount when you sell.
Have a good day,
Troy Medeiros
Vice President
