Most private equity buyers will not even look at companies in the manufacturing sector priced at under $1 million. In addition to less return on investment, these companies are often passed by because the purchase process is too difficult. The seller may not have computerized records, or documented systems for their operating procedures to make transition easy. There is however a whole new wave of buyer that is taking a serious second look at these smaller companies and providing a way for the owners to profitably exit their manufacturing businesses.
Who is this new breed of buyer? They are larger manufacturers seeking growth, which they can’t obtain organically in the current economic climate. Perhaps the sector where they are heavily weighted is stagnating due to sequestration or simply market uncertainty. These large companies are seeking to “buy” new customers. In many cases the acquiring company will buy the equipment as well, as an enticement to the seller. If they don’t need the equipment, they simply sell it off and keep what they were really after, the customers. If there is skilled staff, it’s usually considered a bonus to an acquiring company and they are happy to employ the displaced workers.
If you’re struggling to achieve growth and get back to pre-2008 numbers, you may want to consider this as the “easy button” to increase sales. Aim for companies that will provide you with diversity. If you’re a CNC shop primarily making defense components, consider what else you can make with the machines on your shop floor. Can you make medical instruments or electronics? Aim for those companies.
Also if you really want to edge out the competition, learn how to look beyond the bottom line profit and loss. Perhaps the company wasn’t profitable because the owner chose to expense out the profit to avoid taxes. Look at EVERY expense the company has and ask yourself if you would have the same expense if you were manufacturing the products. Isn’t your overhead already covered? You won’t have to pay the retiring owners health insurance, life insurance and car insurance. With a closer look you might be able to run the same parts much more profitably than he can. Now how does that small manufacturing company acquisition look? By thinking outside traditional mergers & acquisition methods and multiples, you can acquire your way into increased production, profitability and diversification in no time.