What Buyers Ask Us
On a micro level – as an investor or potential buyer, you're concerned with the rate of return on your investment. Most small manufacturing companies work on margins of 35-50%, (some are even higher.) Although return on investment can vary widely based on the manufacturing sector, and other contributing factors, investment in small manufacturing companies historically outpaces the stock markets. There's no better place to invest, which is why manufacturing companies are the most sought after acquisitions in the lower middle market. On a macro level, manufacturing is critical to our economy. Here’s a few stats from The National Association of Manufacturers:
- Manufacturers contribute $2.17 trillion to the U.S. economy in 2015
- For every dollar spent in manufacturing, another $1.81 is added to the economy
- For every one worker in manufacturing, four employees are hired elsewhere
- Most manufacturing firms are small – 75% of these firms employ less than 20 employees
- Manufacturing workers, in 2015, earned approximately 27% more than non-farm industry employees
- Manufacturing performs more than ¾ of all the private-sector R&D in the nation, driving more innovation than any other sector
Think of a broker as your “Business Navigation GPS” who will provide you with:
- A direct route to a large and diverse network of sellers
- Expertise to guide you through the transaction, which includes facility tours, the decision to buy, due diligence, the lending process to closing. Especially if you’ve never bought a business before, their experience and network of professional contacts is invaluable. At the closing table we often hear, "We never could have done this without you!"
Brokers can represent a buyer or a seller. At Accelerated Manufacturing Broker, Inc., although we sometimes take buy-side engagements, we're usually hired by the Seller and have a fiduciary responsibility to them. However, we're also required to treat every buyer fairly and ethically. This is a responsibility we take very seriously. In addition to providing accurate information, we're also concerned with finding the right "fit" for both buyer and seller.
There are many ways to define the value of a business. But, in the case of small to medium size manufacturing companies, the most common method is to use a multiple of Seller’s Discretionary Earnings, (SDE or DE). The “multiple” is determined by a number of factors, such as the type of industry, if the business makes their own products, if they own any patents or trademarks, the overall health of the business, and sales trajectories, to name a few. Much of the information available on the internet about the multiples you should pay for a business are lagging. Multiples paid a few short years ago are not applicable today.
Depending upon the type of business, industry and end game goals, some businesses will be listed with no sale price. This is a great opportunity for a “strategic” buyer who will assign his/her own price to the value of the business based on what it means to them. This is often used in cases where sellers are looking for a partial sale in order to raise capital to get their company to the next level.
From 30,000 feet up – Buyer finds business of interest > Buyer visits business with broker > Broker mediates Q&A between potential buyer and seller > Buyer submits LOI (Letter of Intent) > Terms are negotiated > LOI signed by both parties > Due Diligence & 30 day exclusionary period begins > Potential buyer investigates financials > Potential buyer secures funding (if necessary) > Final agreement/contract submitted > Terms are negotiated > Closing.
From the time a potential buyer
makes the decision
to buy a business, closing generally takes 3 – 6 months.
It depends on a lot of different factors, but in general, you should plan to put down between 10% - 25%.
The broker should provide you with tax returns, P&L’s, balance sheets, an aging A/R & A/P. As you move through the due diligence process, the broker will assist you/your lender in getting any additional documentation such as property leases, real estate appraisals, etc. Be aware that most brokers will need to verify your identity and ability to close the transaction prior to providing financial information on their clients.
If you have a signed Buyer-Broker Agreement, you are obviously responsible for those fees. Beyond that, there will be costs associated with any other professional advisor you engage – accountant, M&A attorney, and possibly SBA fees, etc.
The short answer is YES. The longer answer is that not all manufacturing companies are appropriate for an acquirer without engineering experience. Interestingly, across the country, most manufacturing business buyers are executives leaving corporate America. Accelerated Manufacturing Brokers, Inc., can help you find the perfect acquisition to match your skill set.
That’s okay. These situations can be a little trickier but your broker will assist with navigating a new lease with any landlord.
Sellers will typically stay on for a negotiated period of time to train and assist in transitioning the company. Many will agree to an "as needed" consulting arrangement after that. Many lenders will require a Seller transition period to ensure the continuity of the company, and Sellers are usually happy to accommodate.
From their point of view, they’ve worked their entire life to build their company, provided jobs for folks in their local community – the last thing they want to see is it all disappear in a year.
The bank’s biggest concern is your ability to finance the debt service you’ll be taking on, plus the monthly operational expenses. The SBA has specific federal guidelines, but lenders have the ability to add their own criteria. There are five factors that generally drive financing:
- Buyer down payment – 10% – 25%
- Buyer credit score and debt to income ratio
- Business revenue
- Likelihood of business continuity
- Seller’s note
To learn more about the SBA's perspective, click here. How each deal is constructed varies dramatically. Your broker and lender should work together with you and the seller to achieve a win-win-win.
A lender will need to see your resume, financials and tax returns on you and the business you're trying to acquire, as well as a business plan
A lender looks at the following:
- Sellers Discretionary Earnings
- Sales Trajectory
- Tax Returns & Financials for 3 Previous Years
- Income to Debt Ratio
- Aging report of A/P & A/R
- Buyer's Financial Statement
- Buyer's Tax Returns and Credit Report
- Buyer's Resume with Work History