By Jim Menzies
By Jim Menzies
Let’s face it—for the past several years, manufacturers in this country have been in survival mode.
This has created a reactive environment of short-term management focus and seat-of-the-pants decision-making. But with the rising optimism we’re seeing in the manufacturing industry, now is the time to raise the level of your game and take a more comprehensive and sophisticated view of your business to seize opportunities for growth.
And Canadian manufacturing is in growth mode these days. We are seeing expectations of higher revenue and profits, and anticipating the re-emergence of the U.S. market. Merger and acquisition activity is also expected to pick up, especially in emerging markets, where companies can potentially capitalize on rising demand generated by population growth, increasing wages and real economic expansion.
Manufacturers are quite used to the need for sophistication in innovation and product development. However, sophistication is just as essential when preparing your growth strategies. Having well-thought-out strategies for acquisitions, developing trusted and proactive relationships with lenders, seriously exploring emerging market opportunities and their critical success factors, and implementing comprehensive domestic and international tax planning processes are just a few examples of things you should be thinking about.
Create proactive and thoughtful strategies
When it comes to mergers and acquisitions, smart manufacturers will make sure to have a proactive and thoughtful strategy in place so they can filter potential acquisition candidates. This includes comprehensive criteria and thresholds for things like geography, operating results, tax and litigation risk, IT systems and controls, operating capabilities and synergies—all a necessity for successful M&A activities in the industry today. The more that you can tie these elements to your overall strategy, the more successful the transaction will be. These considerations are especially important when looking to acquire companies in emerging markets—especially since Canadian manufacturers don’t actually have a long history of successful ventures into emerging markets.
Financing is a key element of any M&A strategy, and operations that are well managed and have a strong financial position can typically secure conventional financing. However, even these companies need to be aware that all funding needs are not created equal. For example, the kind of funding required to provide liquidity for shareholders because an owner is planning to retire will be evaluated differently from funding needed to make an acquisition in an emerging market. Many manufacturers ultimately find themselves looking beyond senior debt lenders to alternative providers. Inevitably, though, these alternative sources of financing come at a higher price. While bank financing and senior term debt generally come with an interest cost from 3 to 8 per cent, interest on subordinated and mezzanine debt can reach anywhere from 8 to 15 per cent, depending on the financial strength of the company and structure of the financing required.
While stable companies with solid finances can find lenders, manufacturing executives shouldn’t be complacent and wait until capital is required before arranging the necessary financing. Having a good relationship with your financial partners is more important today than ever before.
Looking closer to home, there are also a number of federal and provincial government financing vehicles and tax credits available to help manufacturers support growth right here in Canada. Make sure you are not only aware of these programs, but that you take advantage of them. Similarly, there are countless foreign investment incentives available to finance growth in the United States and emerging markets. In some instances, these incentives will be the deciding factor when Canadian manufacturers are choosing a market in which to invest.
Remember—growth opportunities happen quickly. Be prepared to identify them, and be ready to take advantage of them. Don’t get left at the starting gate.
Jim Menzies, CA, has more than 20 years of experience in public practice and is currently the national leader of the Manufacturing and Distribution practice for the audit, tax and advisory firm of Grant Thornton LLP.
This article originally appeared in the May 2013 issue of Manufacturing AUTOMATION.