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Industrials Market Outlook: Insights From Axial Dealmakers
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We recently released the Top 50 Lower Middle Market Industrials Investors & M&A Advisors. This list showcases Axial’s 50 most active and sought-after members who specialized in transactions across various industrials sectors over the past 12 months.
In order to better understand the current industrials trends and challenges, we asked select featured members to share insights on the general industry landscape, business owner mentality, and key sub-sectors, including:
- Construction
- Distribution
- Manufacturing
- Industrial Services
Today, we’re sharing these dealmaker insights along with some industrials-focused M&A deal activity from the Axial platform.
We are grateful to all the Top 50 members who contributed to the survey and provided useful color on the current industrials market. The members listed below are quoted in today’s feature.
- Clay Geary, True North Mergers & Acquisitions
- Kate Faust, Rockwood Equity Partners
- Bobby Anderson, House Rock Capital Partners
- Alan Chettiar, FirePower Capital
- Brian Franco, Meritage Partners
- James Cohen, Madison Street Capital
- Gary Kane, Corporate Fuel Advisors
- Ken Miller, BlackRose Group
- Rob Chepak, TREP Advisors
What is the current mentality of business owners/founders right now in the industrials arena, and what difficulties are they facing?
| Mentality of Business Owners |
|---|
| Business owners/founders are most concerned with economic uncertainty which has led to tentative business decisions and growth initiatives. Clay Geary True North Mergers & Acquisitions |
| From our observations, many industrial business owners in the lower middle market (depending on the subsector) are looking to sell. This trend appears to be driven by a recent strong 2-3 year period fueled by pent-up post-COVID demand, and now these businesses are entering a phase of uncertainty. Additionally, we have seen a number of founders approaching retirement age without a clear succession plan. Kate Faust Rockwood Equity Partners |
| Many are struggling with higher rates and demand if they are more oriented around capital expenditures. Generally, I would say business owners are positive about the future though. Axial Buyside Member |
| Business owners are coming to the realization that valuations are lower than their expected value of their business. Bobby Anderson House Rock Capital Partners |
| The majority of our Industrials clients have entered their post-pandemic era and are dealing with a normalized state of customer and supplier relationships. They are focused on operating their businesses as they had pre-pandemic. Alan Chettiar FirePower Capital |
| Optimistic on future growth, but we're seeing a generational change as business owners reach retirement age and pass their company on to the next owners. Difficulties include remaining competitive as larger companies are able to invest more capital into automation & robotics, as smaller businesses aren't able to put that much cash into the business without selling equity or taking on significant debt. Axial Sell-Side Member |
| Business owners and founders are clear on the current market conditions which justifies newer deal terms and structures since Q3 of 2023. Brian Franco Meritage Partners |
| They are experiencing challenges. Moderating sales, higher costs for labor and inputs, and the inability to pass those costs along as they have done in the past make the industrials sector challenging at the moment. Gary Kane Corporate Fuel |
Which industrials sub-sectors are struggling and which are doing particularly well?
| Sub-Sectors Insights |
|---|
| 📉 We believe sub-sectors heavily reliant on new construction or discretionary project spending are facing significant challenges due to risk factors in the current economic climate. 📈 Sub-sectors doing well right now are those that (a) offer low ticket price products or services integral to their customers' value chain, or (b) are backed by steady non-discretionary or regulatory demand. Kate Faust Rockwood Equity Partners |
| 📉 Businesses primarily focused on delivering products into the residential real estate market or consumer are still seeing a performance lag and/or dealing with skepticism from existing or potential investors. 📈 Noncyclical businesses related to manufacturing and distribution of essential/traditional products and industrials that are not dependent on discretionary consumer spending. Also sectors that deal with commoditized products but are able to pass through inflationary pressures from rising input costs. Alan Chettiar FirePower Capital |
| 📉 General contracting sub-sectors are having a tough time - project based revenue and decline in building permits and new developments has impacted this sector. 📈 Roofing, storm damage restoration, and exterior contracting are doing well due to the scalable business models. Clay Geary True North Mergers & Acquisitions |
Industrial Deals By Sub-Sector 2022 – 2024 YTD
Source: Axial Platform Data
The above table shows year-over-year Axial platform data for four industrial sub-sectors. These sub-sectors represent 97% of all deal flow across the industrials sector. This year, average revenue, EBITDA, and pursuit rate are down across three of the four, with only Manufacturing seeing positive YoY increases. We shared this information with the featured members, asking their opinions on what factors are behind the data.
| Factors Impacting Deal Flow |
|---|
| Factors attributing to the declining areas: Project-based revenue, increasing material costs, decline of building permits and total value of the permits issued due to current interest rate environment, significant weather fluctuations (upper Midwest). Factors attributing to manufacturing growth: Geo-political environment and strong demand for quality manufacturing companies. Clay Geary True North Mergers & Acquisitions |
| I think it's an overall deal quality issue. Many owners are in wait and see mode with economic cycle/election coming. Axial Buyside Member |
| Interest rates and lower risk tolerance in the capital markets are not synching with seller value expectations. James Cohen Madison Street Capital |
| The cost of labor is higher in construction and services. The cost of goods is higher in distribution & wholesale. Manufacturing can scale easier than the others with respect to labor and cost of goods. Gary Kane Corporate Fuel |
| Interest rates are too high to fuel growth. Ken Miller BlackRose Group, LLC |
| Shifts in consumer behavior, changes in demand patterns, economic uncertainty, recovery from economic downturn. Axial Sell-Side Member |
Challenges & Opportunities
What are some of the challenges and/or opportunities being faced in the industrials sector on the buyside?
| Buyside Challenges & Opportunities |
|---|
| Challenges include economic cyclicality and sub-sector seasonality. Opportunities include the infrastructure sub-sector and typical M&A synergies. James Cohen Madison Street Capital |
| Interest rates being higher make it difficult to put much leverage on a deal, especially when customers are in more cyclical industries (automotive, energy). Axial Sell-Side Member |
| Currently buyside activities in industrial sector are facing challenges with debt options. Brian Franco Meritage Partners |
| A significant challenge is the perception that fewer 'high-quality' assets are entering the market due to economic uncertainty and, with ample dry powder available, the competition for these assets remains fierce. Kate Faust Rockwood Equity Partners |
| Challenges: Economic uncertainty has limited business owners/founder's appetite for exit. This has limited the pool of potential sellers during a buyside process. Scarcity of funding has been a challenge as well. Opportunities: There is a flight to quality in the market after the surge in M&A activity in 2022. We have received a significant increase in buyside inquiries due to the lack of quality opportunities being actively marketed. Clay Geary True North Mergers & Acquisitions |
What are some of the challenges and/or opportunities being faced in the industrials sector on the sell-side?
| Sell-Side Challenges & Opportunities |
|---|
| The challenges on the sell-side remain due to sellers valuation expectation that are normally not in line with market expectations. Ken Miller BlackRose Group, LLC |
| We've seen a real disconnect in the market between buyers and sellers. Sellers are wanting higher multiples at peak earnings, while buyers are seeking lower multiples at more historical averages of EBITDA. Axial Sell-Side Member |
| Challenges: Trailing twelve-month fluctuations due to abnormal weather patterns such as the lack of snow this past winter and record amount of rain in most recent months. This has significantly impacted service businesses as well as construction. Opportunities: Developing a recurring maintenance/service model will be more desirable to strategic buyers. Clay Geary True North Mergers & Acquisitions |
| Challenges include, ability to prove growth outlook, valuation, and higher interest rates. Axial Sell-Side Member |
| Buyers having to go to the debt market to raise capital to buy continues to be a challenge. The most opportunity for deal flow is in consumer goods manufacturing. Rob Chepak TREP Advisors, LLC |
The Axial Industrials Top 50
– 1 closed deal on Axial | 
– 2 or more closed deals on Axial
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