Critical Questions to Ask Someone Who Wants to Buy Your Manufacturing Company

In this article, we’ll discuss critical questions that every manufacturing business owner should ask of anyone expressing interest in buying their company. We’ll examine what truly qualifies someone to buy your manufacturing company.

What Experience Do You Have in My Industry, or Related Manufacturing Sectors?

If someone has no related experience, how can they understand what it takes to run your business? Many will argue that those with general business experience should make the cut.  Most founder-led or multi-generational manufacturing companies with no next generation to pass the business to are highly concerned about the continuity of the company and future opportunities for the staff. Someone without specific experience is not the right pick to achieve these goals.

An exception to this rule might be a serial entrepreneur with a long history of acquiring and exponentially growing businesses across multiple sectors. If they’ve done that, they know how to identify what a particular business needs to accomplish growth, regardless of sector. Many claim to have this talent, but few actually do.  Do enough digging to know if past growth is smoke and mirrors.

Every manufacturing sector has its own unique language and terminology. Use key industry terms to verify that the buyer has the experience they say they have. For example, ask about the types of resins used if they claim to have experience with plastic injection molding, or compare Swiss vs. conventional CNC turning in the case of a screw machine shop.  Using this method, you’ll quickly determine if they know your industry.

What is Your Financial Qualification?

Questions regarding financial qualification need to go deeper than a potential acquirer’s equity injection and qualification for a loan. Consider the following:

• Do they intend to overleverage the business, thus putting it at risk?
  • If you don’t think this matters, consider that every business that was foreclosed on once qualified for the loan.
• Where is the equity injection coming from?
  • Are they borrowing the down payment, and thus have no skin in the game?
  • Are they overleveraging another business to acquire yours?
• If they are a private equity firm, is the leadership of the firm personally invested in the fund, or are they simply playing with other people’s money?
  • I don’t care what anyone says to the contrary, personal investment can significantly impact the quality of decisions made for the company’s future.
• If they do need an acquisition loan, are they pre-qualified?
  • The last thing you want to do is take your business off the market and later find out that the acquirer can’t get the necessary loan.
• If the acquirer needs an acquisition loan, what lender are they using?
  • This matters when an SBA 7A acquisition loan is used to make the acquisition. If it’s not a Preferred Lender (one qualified to approve the loan on behalf of the SBA), the loan will be required to undergo two separate underwriting processes and take twice the time to close.
• If the acquirer is a private equity firm, where are they in the fund cycle, and when will they be obligated to sell?

If the Acquirer is a Prior Business Owner, What Happened to the Business Under Their Leadership?

• • • Did the business grow? If so, how much?
    • How was the growth accomplished?
      • Growing revenue solely through acquisition is completely different from investing in new machining technologies and implementing lean and other best practices.
      • What changes were implemented to accomplish growth?
    • Have any companies previously owned gone bankrupt?

With this category, you should never take their word for it. You have to investigate to understand the entire story. Not everything is always as it seems. We had a company seek to acquire one of our client companies; they were not a PE firm, but rather a group of professionals who had acquired multiple manufacturing companies. On paper, they appeared to be skilled and experienced operators.

The reality was that after every acquisition, they sold the real estate and leased it back, in some instances pocketing over $5 million. They then completely leveraged all the machine tools and receivables, further enriching themselves. Ultimately, the house of cards began to fall with multiple bankruptcies, employees losing their jobs, and several companies over 100 years old ceasing to exist. Thankfully, they never bought my firm’s client company, but this story shows the importance of doing your homework.

What is Your Plan to Manage the Transition?

Depending on the type of buyer the acquirer is, they may not be at your location on a regular basis, but rather hire a general manager or move someone from their existing company to take the helm of yours.

Others won’t even consider the acquisition of your company unless you have a bench of strong managers in place that can run the company in your absence.

The point is, you will ultimately exit for retirement, so the buyer better have a plan in place to manage that inevitability.

Is the Acquirer Committed to Keeping the Jobs in the Community?

This is of particular concern if the buyer is a strategic with large facilities that can envelop your business into theirs. A lack of commitment to the real estate is a red flag. Even if they don’t want to acquire it, there should be a lease commitment measured in years, not months.  There are, of course, some situations where a business must move, and therefore, this would not be applicable.

One caveat to this is that the buyer may be uncertain about your available capacity.  If they can’t grow the business where it is, they can’t stay there.  In a recent instance with a client, we requested and obtained a contractual agreement from the buyer that the new building would be located within 20 miles of the existing location, benefiting the staff.

Questions to Vet for a Cultural Fit

The ongoing health of your company post-acquisition is often connected to the acquirer being a good cultural fit with yours. Here are some questions that can help you understand an acquirer’s culture:

• What type of benefits do you provide to your current employees?
• Do you invest in continuing education for your team?
• Do you promote from within?
• What is your longest, shortest, and average employee tenure?
• Describe how changes are implemented in your company, and how you get buy-in from the team?
• What was the most difficult change you made after acquiring the company and how did you manage it?
• What are your PTO and vacation policies?

Questions for Those Who Previously Acquired Businesses

• • • Can I speak to the Seller of the business you acquired?
    • Questions for the prior owner of the business:
      • Did the buyer of your business do everything they said they would?
      • If there was a seller’s note, were you paid in a timely and complete manner?
      • If there was a holdback for Reps and Warranties, did the buyer nickel-and-dime you?
      • Was there any litigation regarding the acquisition?
      • Are the same people still employed?
      • Has your opinion of the buyer’s character and business acumen changed after the acquisition was completed?
      • Do you regret anything about selling to them?
      • Do you feel you made the right decision and why?

If a potential buyer gets irritated or offended at these questions, they’re not someone worthy of acquiring your manufacturing business. Quality buyers will welcome these questions because they know their answers will set them apart from the crowd and give them an opportunity to shine.

That said, many manufacturing business owners would find it hard to ask these tough questions, but they must be asked to truly understand who you’re dealing with and if they’re an appropriate match to continue and build upon your legacy.

At Accelerated Manufacturing Brokers, Inc., we’ve been asking the tough questions to thoroughly vet potential buyers for our client companies for over 30 years.  We’ve got the toughest vetting standards in the industry. The unqualified and tire-kickers are eliminated, allowing our clients to remain focused on their businesses.