What's Happening?
Ryan Kirby, a partner at Alderman & Company, has highlighted the increasing rigor of buyer due diligence in the aerospace and defense (A&D) middle-market mergers and acquisitions (M&A) sector. According to Kirby, sellers who delay preparation until they
are actively in the market often face financial penalties in terms of price and terms. He notes that while core focus areas like earnings and growth projections remain constant, the quality-of-earnings report has become a standard requirement in the lower middle market over the past five years. Buyers scrutinize five-year projections, demanding realism and defensibility, and also focus on areas like inventory write-off policies and supplier concentration. Kirby emphasizes that sellers must consistently meet monthly and quarterly targets throughout the sale process to demonstrate financial credibility. He also advises A&D owners to track comprehensive data, such as revenue by part number, service, product, program, customer, and geography, to validate company performance.
Why It's Important?
The heightened scrutiny in A&D M&A due diligence signifies a maturing market where buyers are increasingly risk-averse and demand greater transparency and financial robustness from potential acquisitions. This trend impacts U.S. aerospace and defense companies, particularly those in the middle market, by necessitating earlier and more thorough preparation for a sale. Companies that fail to adapt to these rigorous due diligence standards risk lower valuations, unfavorable terms, or even failed deals. The emphasis on quality-of-earnings reports and detailed financial projections means that robust accounting practices and data management are no longer optional but critical for maximizing sale value. Furthermore, the focus on supply chain concentration and regulatory compliance, such as ITAR and CMMC, underscores the complex operational and legal landscape within the A&D sector, requiring sellers to proactively address potential vulnerabilities to avoid delays or price reductions.
What's Next?
For A&D business owners considering a sale, the immediate next step, as advised by Ryan Kirby, is to first define their personal goals for selling. Once the decision to sell is firm, owners should assemble a trusted team of advisors, including an M&A attorney with relevant experience, an industry-specialized M&A banker, and an accountant capable of producing and defending a quality-of-earnings report. This proactive approach to team building and preparation is crucial for navigating the complex and time-intensive M&A process effectively. Sellers will need to focus on maintaining consistent financial performance, meticulously tracking operational and financial data, and addressing any potential compliance issues well in advance of engaging with buyers. The market will likely continue to demand this level of preparedness, making early strategic planning essential for successful transactions.
Beyond the Headlines
The evolving due diligence landscape in A&D M&A reflects broader shifts in corporate governance and risk management across industries. The demand for detailed financial and operational data, coupled with rigorous compliance checks, highlights a move towards greater accountability and transparency in business transactions. For the A&D sector, this trend is particularly significant given its strategic importance to national security and its reliance on complex supply chains and regulatory frameworks. The increased emphasis on data analytics and financial reporting could drive technological adoption among middle-market firms, pushing them to invest in better enterprise resource planning (ERP) systems and data management tools. Ethically, this trend promotes more responsible business practices, as companies are incentivized to maintain accurate records and adhere to compliance standards, ultimately fostering greater trust and stability within the industry. This also suggests a long-term shift where operational excellence and robust internal controls become as critical as innovation and market share for valuation.
