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Smart M&A Calls for Regular Benchmarking

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Jan. 6, 2016 Smart M&A Calls for Regular Benchmarking Dealmaking in the service center sector has been muted in recent years. Both buyers and sellers are applying greater diligence to the process of assessing the value of the target, a trend that will continue to reduce the pace of mergers and acquisitions, predicts John Jazwinski, managing director of Exemplum. “We believe fewer transactions will be completed going forward—not due to a lack of interested buyers or sellers, but rather to their increasingly disciplined and targeted attitude toward M&A,” he says. Regardless of whether a deal to buy or sell a company is imminent, Jazwinski says, service center operators should understand how to properly value the business. That involves more than just measuring a company’s current and historical financial performance, as has been the traditional method. “That is not an incorrect approach, but it considers neither broader mid-term industry change nor the near-term strategic choices of large competitors,” he says. Instead, Jazwinski advocates periodic benchmarking, comparing a company’s results against the most-successful players in the industry. For service centers, that means measuring up against the best publicly traded enterprises, distributors such as Reliance Steel & Aluminum Co. and Worthington Industries. From there, service centers need to pick the right metrics to provide the clearest picture. Financial measurements such as enterprise value to EBITDA, gross margin, average EBITDA margin, inventory turnover and return on invested capital are among the most informative for comparative purposes. “Benchmarking should be done on a quarterly, or at least annual, basis to keep your business on track and make sure it is well positioned for optimal value in a sale, acquisition or financing transaction,” Jazwinski says. For greater detail on using financial metrics to assess business valuations, see Business Topics in the January issue of Metal Center News.