As an M&A expert selling exclusively within the manufacturing sectors, I’m often asked what the sale process looks like. In this article, we’ll examine the 12 critical steps to selling a manufacturing business.
Here are the steps, which we discuss in detail below:
- Determine the Value & Appropriate List Price
- Develop Marketing Materials
- Determine the Target Market
- Vet Buyers Professionally & Financially
- Initial Call with Buyer & Seller
- Submission of IOI
- Buyer Visits Manufacturing Plant
- Post Visit Q&A
- Submission of an LOI
- Due Diligence
- Purchase & Sale Agreement Negotiation
- Closing and Transition
Let’s look at each step in detail:
Step 1 - Determine the Value & Appropriate List Price
Having an accurate understanding of the value of your manufacturing company is the first and, I’d argue, one of the most critical steps to selling a manufacturing business.
An inaccurate opinion of value means you’re either leaving money on the table or you’re pricing too high and quality buyers won’t engage. There are many factors that affect value and every manufacturing company is unique. You can access a detailed article on 15 items that affect the value of a manufacturing company in Business Valuation: What’s My Manufacturing Company Worth.
Many M&A professionals charge exorbitant fees to provide an opinion of value. I do not think business owners should pay upfront fees for this. Asking an M&A professional to provide their logic behind pricing can tell you a lot about them before you actually engage their services. You’ll find out quickly if they know what they’re doing. You can read more on upfront fees in Business Broker Upfront Fees – Should You Pay Them?
Step 2 - Develop Marketing Materials
An M&A professional should develop a “book” about your business that answers typical questions any buyer will ask. There are different names for these books, a CIM, Offering Memorandum, or a Pitch Book. The pitch book should only be given to potential buyers with a non-disclosure agreement in place.
Other marketing materials may include a one-page “teaser sheet,” trade publication advertisements, videos, ads and more. It’s important to note here that confidentiality should be maintained in these advertising media until a potential buyer has been completely vetted. You can learn more about maintaining confidentiality in Maintain Confidentiality While Selling a Manufacturing Business.
Step 3 - Determine the Target Market
When selling a manufacturing business, the target market for the sale of manufacturing companies will always include large strategic buyers in the same or complementary industries as well as private equities. There is however another key buyer type that should never be ignored, even though they’re harder to reach. Learn more in The #1 Mistake Made By Manufacturing M&A Firms.
Step 4 - Vet Buyers Both Professionally & Financially
This is an incredibly time-consuming function and one where it’s important for manufacturing business owners to be represented by an M&A professional.
It’s not uncommon for 150-300 potential buyers to request information on a deal. If all of those are being invited to conference calls and visits with the Seller, the Seller won’t have time to focus on his or her business. A good broker will narrow down potential buyers from 300 to 6-12 quality buyers who are ready, willing and financially able to buy in an appropriate time frame.
Step 5 - Initial call with a Buyer and Seller
I’m always amazed at how nervous potential clients can be surrounding initial contact with a buyer. I can’t speak to how other firms navigate this, but we are always on the call to facilitate introductions and conversation on key points.
We’re there to both guide and enhance the conversation so that neither side feels awkward. We’ll often ask our client a leading question to allow them to speak to their strong points. We also make talking about the weaknesses a business might have easier by connecting that to a particular buyer’s strength and past success so that they see opportunity.
Step 6 - Submission of an Indication of Interest (IOI)
During this year when selling a manufacturing business since the COVID-19 pandemic, both buyers and sellers don’t want to engage in travel unless there's a high probability of success. To that end, the parties typically use an Indication of Interest (IOI) to ensure they are on the same page from a value perspective before going through the time, expense and risk of travel.
An IOI provides a broad look at potential value, which is often stated as a range, for example, $10MM-$13MM. This value can change substantially when a more formal offer is received. The reason being when a potential buyer submits an IOI, they have not yet visited the business. An LOI (see below) is specific on price and terms.
Asking for an IOI before a visit provides the opportunity for the M&A professional and the Seller to restrict access based on a potential buyer's unrealistic price expectation, thus saving everyone time.
Step 7 - Buyer Visits Manufacturing Plant
After conference calls, zoom calls and pre-visit Q&A, buyers will want to visit the target acquisition. If a buyer is going to spend millions to acquire your company, they’ll want to meet with you face to face.
During a plant tour, buyers are vetting the acquisition on multiple levels. Is there a fit both operationally and culturally, and can the business be easily transitioned to new ownership?
Curb appeal matters. Organization matters. If they see a mess, they will assume that the business is not organized and will be a nightmare to transition. Your M&A professional should be present during these visits to facilitate in the same fashion as the initial conference call.
Step 8 - Post-Visit Q&A
This is exactly as it sounds. The facility visit will spark questions that don’t always come up the same day. The key to this point is the speed of response. Speed shows both engagement and organized information – both things that a quality buyer wants to see. If a good potential buyer submits a list of post-visit follow-up questions and it takes three weeks to respond, the Seller may lose the opportunity.
Good buyers are typically looking at several deals simultaneously. Providing answers in a timely manner indicates that you're well organized and that transitioning the company to new ownership will be easy.
Step 9 - Submission of a Letter of Intent (LOI)
A letter of Intent is more serious than an IOI and spells out the broad strokes of a deal that both sides are willing to engage in. Critical items include the price, basic terms and timelines of the deal.
An LOI is often not in a condition where it can be signed when initially received, but rather the start of a serious conversation on what both sides are willing to accept. Don’t be disappointed if it’s not perfect out of the gate. A good M&A professional will negotiate the terms until there’s agreement on both sides.
Step 10 - Due Diligence
The Due Diligence process can be anywhere from 30-90 days, depending on the size of the business and how complicated the financial information is. During this period the buyer is verifying everything that both the broker and the Seller have told them about the business.
If acquisition financing is involved, there may be an additional layer of diligence with the bank underwriters seeking more information. This is the period of time that requires the most stamina on the part of the Seller when selling a manufacturing business. There will be a lot of information requested and it will take time to produce.
Step 11 - Purchase & Sale Agreement Negotiation
As due diligence comes to a close, the buyer will submit a draft of the Purchase & Sale Agreement (PSA), sometimes called an Asset Purchase Agreement (APA). This is the document that will legally govern the transaction. Although it is imperative that Sellers be represented by legal counsel, your M&A professional should be taking a first look at the document on your behalf.
The document needs to mirror the terms previously agreed to in the LOI. If it doesn’t, the broker should be dealing with the buyer to correct those issues before submission to the attorney. If an acquisition lender is involved, they will often ask for the PSA to be signed in advance of the closing. Other times it is signed the day of closing.
Step 12 - Closing and Transition
On closing day wire transfers will be completed, but it doesn’t end there. Sellers are typically required to remain with the acquirer for 6-12 months. The buyer will need your cooperation in successfully transitioning customers, suppliers and employees. This is why Sellers need to start the process early, while they still have the energy to provide transition services.
Selling a manufacturing business can take about a year and you may be required to help with the transition for a year. That means you should be planning 2.5 - 3 years in advance.
Follow these 12 critical steps to selling a manufacturing business to experience the best results. If you’ve got questions, we’ve got answers.