The past few weeks have shown clearly where acquirers' attention is in aerospace.
On October 1, Ontic completed its acquisition of the Aero-Mach Companies in Wichita, adding repair and overhaul, parts distribution, and static discharger manufacturing to its portfolio.
Days earlier, TransDigm closed its roughly $1.07bn acquisition of Prince & Izant, and Mason Wells acquired thermocouple manufacturer Cleveland Electric Laboratories.
The common theme is the aftermarket. As ABN has published in other In Depth articles, persistent supply constraints, ageing fleets and workforce shortages are putting a premium on parts availability.
Regional operators are hearing that there is minimal availability of new aircraft for fleet renewal. Older aircraft are flying longer, and the businesses that keep them flying are in demand.
For owners of middle-market aerospace and defence companies in the aftermarket, this is welcome news.
Buyer interest is strong, and as we noted in this column in January, blue-chip customer relationships and exposure to the right programs are commanding premiums.
Premiums come with harder due diligence
There is a second half of this story that sellers hear less often. When buyers pay premiums, they tend to diligence harder.
A buyer paying a strong multiple for a repair station or component supplier is underwriting continuity.
It is betting that the revenue, the people, the approvals, and the know-how will all still be there after closing. Buyers pay premiums for confidence, and they test that confidence line by line.
Over 25 years of selling middle-market A&D businesses, we have seen the gap between a headline offer and the price paid at closing decided, most often, in buyer due diligence.
That happens after the Letter of Intent (LOI) is signed, when the seller has granted exclusivity and lost its competitive leverage.
Four areas where value is lost in due diligence
In today's market, we see that gap open most often in four places.
1. Single points of failure
Buyers think about risk as probability times consequence, and a supply-constrained market magnifies the consequence.
Picture the five-axis mill that makes your highest-margin part, with one operator who knows how to use it.
Add the sole-source material supplier, the quality manager who handles every AS9100 audit, and the customer relationship that lives with one salesperson.
A buyer's diligence team will map each of these. When the answer to "who else can do that?" is "nobody," the buyer discounts the price, moves value into an earnout or escrow, or requires retention agreements the seller pays for.
The remedy is cheaper than the discount: cross-train operators and document setups, qualify second sources, introduce a second person to key customers, and make sure certifications and system credentials belong to the company, not an individual.
2. Backlog that is not what it seems
Strong demand has swelled backlogs across the supply chain, and sellers are understandably keen to deal with them.
Buyers do not take a backlog number at face value. Long-term agreements and blanket purchase orders with primes often fix price without committing to volume, and many buyers count a release schedule as backlog but not a demand forecast.
Composition matters as much as size. Backlog concentrated on one customer, or on a platform late in its production life, is often discounted in underwriting. Build the schedule yourself before going to market: contract by contract, funded and unfunded, firm and optional.
3. Revenue recognition and know-how
Aftermarket and long-lead programme work rarely fits a simple ship-and-invoice model.
Progress payments recorded as revenue, bill-and-hold arrangements without support, and shipment-basis recognition where the contract calls for over-time treatment are common quality of earnings findings. Each can reduce reported EBITDA at exactly the wrong moment.
Know-how carries a similar risk. Much of what makes a repair station or component supplier valuable was never patentable: repair procedures, process tolerances, the tribal knowledge of how jobs get done.
These are trade secrets, and their legal protection generally depends on the owner having taken reasonable measures to keep them secret.
Employment paperwork that covers only 'inventions' invites a diligence finding, and findings tend to return as indemnity requests. Having legal counsel review your new-hire documents, well before a sale, costs little.
4. Surprises after the LOI
Every business has areas where buyers may have due diligence concerns: a key contract up for re-bid, unreserved excess inventory, a recent key employee departure, a customer audit with findings, incomplete CMMC compliance.
These are usually manageable. The timing is the problem. Found after exclusivity is signed, they become reasons to re-trade the price, add an escrow or walk away.
Our advice is to disclose them first, in the Confidential Information Memorandum (CIM), with the supporting facts. This is not a confession. It is a balanced presentation of a business with many strengths and some imperfections.
Equally, the CIM should not contain statements that will not survive diligence. EBITDA addbacks your quality of earnings provider has not accepted, and sweeping claims of "full compliance" can turn into price reductions or into representations and warranties in the purchase agreement.
Have each functional leader review the sections they own before the CIM goes out. Otherwise, the moment will come in a management meeting when one of your managers tells a buyer "that is wrong."
Choosing the buyer, not just the price
An active market means more bidders, and sellers should look beyond the headline value. A buyer's conduct in its recent negotiations, after the LOI, is the best predictor of how it will treat you.
Most buyers describe themselves as reasonable and fair; few behave that way once exclusivity is signed. An experienced A&D banker has usually dealt with the buyer you are considering or knows those who have.
Buyers are paying for certainty
We at Alderman & Company believe the current aftermarket cycle is a strong opportunity for middle-market A&D sellers. Buyers are paying for certainty.
The sellers who capture the full value are the ones who can prove it: they have found their own single points of failure, built their own backlog schedule, cleaned up revenue recognition, protected their know-how, and disclosed their imperfections before a buyer finds them.
