Let’s Make a Deal? M&A Experts Say That Landscape is Changing

Originally published in Furniture Today
Sheila Long O’Mara //Executive Editor, Furniture Today
MIAMI — The home furnishings industry has seen a number of mergers and acquisitions over the past few years, and according to two industry experts, the landscape for those deals has shifted dramatically in the post-pandemic era.
Howard Armistead, managing director of Mann Armistead & Epperson Ltd., and Bo Stump, a partner with Stump & Co., took the stage at the 2023 Leadership Conference here to discuss the future of mergers and acquisitions in the home furnishings space and the changing market dynamics that impact the business.
The dividing line in the conversation was pre-pandemic vs. post-pandemic, and the seismic shift that occurred once consumer demand slowed following quarantines and shutdowns.
The deal-making business has changed significantly over the past three years with several key trends rising to the top. Securing heavy debt to acquire companies is now passe, private equity’s appetite for furniture has waned, and deals in today’s environment tend to be smaller in scale.
As a trend goes, often the deals the industry sees in today’s climate will be acquisitions of companies that have found themselves in challenging situations and need a buyer to remain solvent.
“Deals today are going to be deals that have run into tougher situations,” Stump said. “We’re seeing, in general, companies that are struggling, and they need a strategic buyer, partner or someone so they can get off the roller coaster.”
Companies today are buying other entities for different reasons, and the structure of deals continues to evolve. Stump and Armistead agreed that today’s increased interest rates make it more expensive to take on debt through acquisition loans, and as a result, the industry is seeing smaller, more cash-funded deals.
“The structure of deals today is different,” Armistead said. “Pre-COVID, deals were funded by cash or indebtedness. Now, we’re seeing structures of joint ventures based on geographic or product complements, allowing companies to combine resources like warehouses or distribution centers.”
According to the experts, traditional banks are skittish about making big acquisition loans right now. Private equity can offer expensive debt, but for the most part the industry is likely to see small, cash-only acquisitions by companies.
Over the past 12 months, the industry has seen a number of companies close suddenly when lenders pulled funding. Lane Furniture, Klaussner Furniture and Mitchell Gold + Bob Williams had similar stories with abrupt closures, and each cited issues with banks. Those incidents have given the industry a black eye in the private equity market, Armistead said.
“Private equity is not looking feverishly at our industry right now,” he said. “You mention furniture, and it gets quiet on the other end of the phone. If the guy is still on the phone and you mention retail, well, then you get the hangup.”
Armistead said there are more than 100 private equity firms that are in, or have been in, the home furnishings space. “It’s not that they don’t like furniture, it’s just that they don’t like furniture right now,” he said.
Stump said while the big equity funds are not looking to invest in furniture at the moment, private equity players that are already in the business haven’t exited.
“Some of those are looking to go pick up some adds, and they may be able to find what they perceive is a value,” he said. “Some of the private equity firms in the industry know they are here for a few more years, so why not make some smaller bets. There is a lot less competition from a buyer’s perspective today.
“At some point, we will reach the reascent of the positive momentum, and then there will be a pool of capital that comes back into the industry,” Stump added.
The advice for companies that may be looking to sell? Get your balance sheets in order, shore up your management team, and take care of your facilities or stores. It’s like selling a house, Armistead and Stump agreed. Repairing or replacing a leaking roof is paramount to closing a deal or even getting a second look.
“The financial piece is critical,” Stump said. “We recommend going through financial due diligence to be able to correct things. That piece has become more and more important.”
Armistead added. “If we find the problem, it saves the seller money. If the buyer finds the problem, it will lose the seller money.”