With an incredible number of manufacturers exiting business ownership for retirement, it’s imperative that sellers make their businesses stand out from others on the market. In this article, we’ll discuss how to get the best price for your manufacturing company.
Here’s what we’ll be covering:
How to Get the Best Price for Your Manufacturing Company, 10 Critical steps:
Step 1. Have 3-5 years of financials and tax returns ready for review by quality buyers, and be ready to provide quarterly updates during the sale process
Step 2. Have data available on your sales by customer and customer concentration
Step 3. Have established and well-documented procedures for every major function of your business
Step 4. Make sure there are others in your organization that can perform any function you do
Step 5. Ensure that your manufacturing facility is clean and well organized
Step 6. Have younger workers as part of the team that is being trained for leadership
Step 7. Hire an industry expert to help you navigate the process
Step 8. Continue to run it like it’s not for sale
Step 9. Have patience and stamina during the sale process
Step 10. Prepare yourself emotionally to exit the business
Now let’s take a look at each of the top 10 things that must be done to get the best price for your manufacturing company.
Have Financial Data Ready
Diving into this in a little more detail, it’s important that a quality buyer, their financial team and acquisition loan underwriters be able to connect the dots between your internal financial statements and your tax returns. Often CPAs will make changes to what the company provides to them in order to complete the tax return.
An example of this would be a manufacturing company purchasing a machine tool and expensing it. The CPA will likely bring the asset into the balance sheet rather than the P&L, then depreciate the asset appropriately. It’s important that the internal P&L be updated to reflect this change. Here’s a real-life example of why this matters.
Recently a buyer who was excited about a particular acquisition almost backed out of the opportunity. In looking at internal P&Ls for two consecutive months, the company showed a dramatic downturn in profitability from one month to the next. Having been to the manufacturing plant often, I was aware the company had new machine tools delivered during the second month in question.
In looking at the balance sheet, there was no increase in assets. We quickly discovered the full purchase price of several new machine tools was expensed. The CPA made the appropriate corrections to the internal financial statements and the buyer remained engaged.
One final note on this subject. Trying to get the best price for your manufacturing company, providing several years of financial data is an absolute must to the M&A process. However, you’re not done there. Buyers and acquisition lenders will require quarterly and sometimes monthly updates. If they’re not promptly provided, buyers will move onto a different acquisition.
Have Customer Data Ready
Customer concentration is a risk factor for buyers and lenders. Providing sales by customer is not optional, but critical to the process. That said, sellers also need to be protected in the process of selling and avoid providing too much information too early in the process.
So here’s a suggestion: Names of customers can and should be redacted in sales-by-customer charts until there is an agreed-upon deal and the buyer is in due diligence after having been fully vetted. See our article for more information on maintaining confidentiality during the process.
Have Documented Standard Operating Procedures
When buyers look at manufacturing acquisitions, a critical determining factor is how hard will it be to transition the company. Having documented SOPs provides a comfort level to a buyer that transition won’t take long. It allows them to see what you do and how you do it. It tells them that your company has a level of organization that quality buyers expect.
Your Business Must Function Without You
A company that can’t function without its owner is a company that either isn’t sellable or only sellable at a discounted price. The why of this can be answered in one word – RISK.
Buyers and lenders see risk in owner dependence in two ways:
- If something happens to the owner before the company is properly transitioned to new ownership, the entire investment could be at risk.
- Additionally, if sales are dependent on only the owner/customer relationship, what happens when the owner leaves? Does the company’s core income leave with him? Owners often don’t think about how their style of running the business can lose them millions when it’s time to sell.
Have a Clean and Well-Organized Facility
Curb appeal matters. If a buyer is looking at competing manufacturing companies and all else is similar, they’ll choose the one with more curb appeal. Many manufacturing business owners think this doesn’t matter.
Having sold hundreds of manufacturing companies to buyers from all over the country, I can tell you without a doubt, it matters. Having a clean facility without piles of papers, dust, and metal chips shows a buyer pride of ownership. They translate this to the machine tools and other assets being well cared for, which equals less capital expenditure for them after the acquisition.
Younger Workers in the Mix
It’s no secret that we’re suffering from a national skills gap in the manufacturing sectors. After decades of elimination of shop classes and schools pushing kids into college for careers that don’t exist (thank you politicians), we’ve now got a very big problem.
Again, working nationally, I’m seeing some manufacturing business owners doing more than just complain about it. As a result, some are not feeling the skills gap the way others are. They are finding creative ways to engage with students who are still in high school and helping them choose manufacturing as their preferred career choice.
Using the same word I’ve used previously to tell you why this matters, RISK. If buyers see that your entire workforce is nearing retirement, they see nothing but risk. They require a comfort level that the company can continue to produce the income they’re spending millions to buy.
Younger workers in the mix being trained for leadership accomplishes this goal. For more information on how some owners are pro-actively dealing with this national crisis, check out How Smart Manufacturers are Closing the Skills Gap – Apprenticeship.
Hire an Expert to Help You Navigate The Process
As an M&A professional, I realize this point could be considered self-serving. Honestly, it is, but there’s more to it than that. The largest transaction of your life is not the time for a DIY adventure. Having a barrier between you and a buyer protects you during the process. They know how to negotiate the best price for your manufacturing company. A professional broker can weed through the tire kickers ensuring that buyers are both professionally and financially qualified, leaving you to focus on your business during a critical time.
Typically, my firm vets between 150 – 275 buyers, allowing about 6-10 to visit before the company goes under contract. This requires teams of researchers. Can you imagine trying to do this yourself?
Another issue is exposure to qualified buyers. Do you know how to reach the best acquisition candidates nationally? We do. For more information on why selling your manufacturing company with a DIY approach could be disastrous, check out this article (Selling Your Manufacturing Company – Why Doing it Yourself Could Be Deadly).
This point can’t be overemphasized. Check out our additional article, (Selling a Manufacturing Company – The Most Critical Skill Required) on the games buyers sometimes play and ask yourself if you have time to deal with all this.
Run it Like It’s Not for Sale
The biggest mistake manufacturing business owners make on the approach to retirement is disengaging from the business and allowing sales to decline. They coast to retirement, not understanding how much this will affect the retirement dollars they achieve from the sale of their company.
You should be running the company like you’re going to have it for the next 20 years. That means both maintaining and growing sales. It means making needed capital expenditures to remain competitive in your field. It means continuous improvement in every area of your business.
Manufacturing companies that are run as if they will never be sold are incredibly attractive to the best buyers. They stand out from the crowd of companies on the market and command higher prices.
Have patience and stamina during the sale process
The sale of a manufacturing company is a marathon, not a sprint. There will be dozens of questions and requests for document production from the buyer, their acquisition loan underwriter, their CPA and their attorneys. The process can be exhausting and it’s easy for people to get tired toward the end of the process. You must finish the race to get the prize.
Over 25 years I’ve seen some very successful and emotionally healthy business owners lose heart as they’re rounding third base for home plate. Without fail, they’re ecstatic when it’s done, and thankful that they finished the process.
Going into the process with an appropriate mindset helps. Sellers often think the hard part is done once a buyer makes an appropriate offer and the Letter of Intent is signed. The reality is that’s when the hard work begins.
In addition to the list above of people seeking data, there will be a business appraiser and an asset appraiser for the bank, environmental studies, and negotiation of the purchase and sale agreement. Understand that you will absolutely need patience and stamina to get through the sale process.
Prepare Yourself Emotionally for Retirement
For many, work is part of your identity. Leaving work behind means leaving part of yourself behind. Can you handle that? What does retirement look like? Will you continue as a consultant for the acquirer? If you still intend to be involved, what does that look like? How many hours a week or month? Is there something else you prefer to be doing in retirement, or simply do nothing?
The time to mentally explore this is before your business is on the market. A seller who doesn’t know what he wants retirement to look like scares a good buyer. Buyers spend a lot of money during the due diligence process on appraisals, accounting review, attorneys and financing applications.
If you aren’t clear about your goals, buyers fear you’ll back out of the transaction before the closing. Spend time considering your options and what you truly want during retirement before you put your business on the market. Be ready to articulate clearly to a buyer what you are and are not willing to do post-closing.
Follow these 10 tips to get the best price for your manufacturing company. Reach out to us with any questions here.