If you have been dreaming of owning your own business for years, there’s no time like the present to ramp up your search! We previously wrote an article on the “101 Questions You Must Ask Before Buying a Manufacturing Company.” Before you can even ask these questions however, you
If you have been dreaming of owning your own business for years, there’s no time like the present to ramp up your search! We previously wrote an article on the “101 Questions You Must Ask Before Buying a Manufacturing Company.” Before you can even ask these questions, however, you will need to find the right business!
Here are the four critical steps to buying a manufacturing company of your own.
- Expand your search
- Network with M&A Professionals
- Find appropriate lenders
- Hire an M&A attorney
Below, we will expand on these steps in more detail:
Step 1: Expand your search – Smaller might be better
We receive dozens of identical emails each week saying: “I am looking for a business with $2-10 million in EBITDA in a stable industry with an owner wanting to exit.” It seems the entire private equity world is competing for the same thing: $2-10 million in EBITDA and up. Our first piece of advice to those seeking acquisition in 2019 is to expand your search just below this range, even to companies with $1 million in EBITDA.
You will be pleasantly surprised to find many quality companies with the same level of leadership, systems, and profitability as larger companies. There is no advantage to buying a manufacturing company running at full capacity—it will take major capital expenditure past the purchase price to grow it any further.
With the right leadership, a $1 million EBITDA business can quickly become one of those in the coveted $2 million EBITDA sweet spot. Open your mind to the possibility of growing into the perfect company, rather than wasting time and money tracking down a rare exact fit.
Step 2: Network with M&A professionals – Be the first to hear about new listings
People are often scared to reach out to professionals because they don't want to pay excessive fees for services. Engaging in conversation with brokers does not necessarily mean a full-fledged buy-side engagement! Introduce yourself and get your name on their radar—even a simple connection can keep you top of mind when something comes along.
Different brokerage firms have different processes for interested buyers, so find out how to get yourself qualified and on their Top Buyers list. Reach out, have a conversation, explain your experience and financial qualifications, and learn about the process.
It doesn't hurt to have an M&A professional keep an eye out for the perfect fit!
Step 3: Find appropriate lenders – Get qualified
Depending on how you intend to fund your acquisition, you will most likely need to engage a bank. It is important to understand what banks look for when granting acquisition loans. Some base a business’s worth on assets and collateral, while others have no problem with asset-light companies and will lend based on cash flow.
For example, one of our clients took advantage of accelerated depreciation on their machine tools for tax purposes. On the books, their equipment was valued at only $600,000. However, the actual worth of the tools, if they were to be sold at auction, was over $1.6 million. Banks that looked only at the tax returns rejected the deal because there wasn't enough collateral. Banks that recognized the equipment's value and had a more entrepreneurial style were happy to do the deal.
Talk with multiple lenders and learn what they are willing to lend on. When you find the right business, you will already have contacts at banks with the right lending style.
Step 4: Hire an M&A attorney – An experienced attorney is invaluable
You will need an attorney to guide you through this process, and it's important to hire one who understands how mergers and acquisitions work. A good M&A attorney will save you tons of time, potential issues, and money.
In our recent sale of a New England fabrication shop, the buyer’s and seller‘s legal fees had a large discrepancy—one was nearly DOUBLE the other. The difference? One attorney had M&A experience, while the other did not. The inexperienced attorney took twice as long to get the job done and nearly blew up the deal with inappropriate demands. If you're thinking about an acquisition consultant, you may want to read our following article "The Acquisition Consultant Who Destroyed a Buyer’s Dream Acquisition with Bad Advice."
Make sure you vet and hire someone with the know-how to sail through the process—having one on board early will help when buying a manufacturing company.
Happy searching!