Among the top concerns of many in business right now is the supply chain. The thought, not too long ago, was that once COVID could be better managed, the world would essentially spring back to normal. That’s turned out not to be the case.
David Iwinski, managing director at Blue Water Growth, says COVID, and the market shutdowns that ensued in its wake, marks a tipping point in the economic relationship U.S. businesses have with China. And he expects this will complicate the M&A transactions of those whose supply chains link them to the country.
“It affects it in a number of ways,” Iwinski says. “One thing is that you actually have to look deeper into the companies that are being acquired than you've ever had to before.”
In the M&A work that involves scrutiny over sourcing and supply chain he’s done over the last 12 years, this year has stood out for the heavy audits performed for venture capitalists and private equity.
“It was rare when anybody looked into, ‘Well, how is your supply chain? How fragile? Do you have a lot of your parts in one country or one company?’” he says. “Now, we're being asked to go kick those tires hard.”
This issue invites both practical and valuation concerns. He says it was unlikely before COVID that the valuation of a company was affected dramatically by the quality of the supply chain. But now, a weak supply chain, marked by a lack of diversity in origin, options, shipping and transport methods, is a significant issue.
“Obviously, a weak supply chain now is a huge risk and that means that the valuation of that company is going to be concurrently lower,” Iwinski says. “So company should do this, not just because it's the right thing to do. It makes them more valuable to have a better, stronger, more resilient supply chain.”
Supply chain woes, he says, could be the result of small, inexpensive parts. But typically, acquirers would worry most about the big-ticket items that would seemingly cause the most trouble if their supply was disrupted. That’s why the analysis of a company's supply chain shouldn’t just focus on volume, value and vulnerabilities. It should also look at ease of replacement.
“If you've got a 17-cent part, but one that you can buy in any hardware store, it doesn't matter if you're buying from one supplier,” Iwinski says. “If that person goes under, there's a whole row of them, you can go get them the next day. It's the customization and the uniqueness of those parts, even if they're very small financial value. How they fit into the whole puzzle is really the critical part.”
Iwinski spoke on the Smart Business Dealmakers Podcast about the supply chain issues between U.S. and Chinese companies, how they’re affecting M&A transactions and offers strategies for rooting out supply chain risk ahead of, and during, a transaction. Hit play below to catch the full conversation.
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