Looking For A Manufacturing Business Acquisition In All The Wrong Places
As I type this title I can hear the old Johnny Lee song from the 1980’s “Looking for Love In All The Wrong Places.” Unfortunately good buyers are looking for manufacturing business acquisitions in all the wrong places too! Both individual buyers and private equity groups alike are seeking companies of a certain size, usually companies with over $15 million in sales. Both groups complain that when they find something they like, the competition is fierce, and they are correct. Here’s how to slightly tweak your search to find the best manufacturing companies in America; the golden nuggets that can grow exponentially.
Where To Look For A Manufacturing Business Acquisition
The problem these acquirers have is that they’re looking for a manufacturing business acquisition in all the wrong places. Better stated, they’re looking for the wrong size company. According to the U.S. Census Bureau, in 2014, there were 251,901 firms in the manufacturing sector, with all but 3,749 firms considered to be small. How small are they? Better than three-quarters of these firms have fewer than 20 employees. The problem is that many buyers think small means poorly run or small means that the company can’t be scaled up. If most manufacturing firms in the U.S. have less than 20 employees, it stands to reason that’s where you should be looking for an acquisition. Before you stick you’re nose in the air, read on.
What’s Your Goal?
What’s your goal as an investor? It’s ROI, right? Of course it is. Consider the age of those retiring from manufacturing. They are of a generation that is generally not Internet savvy. Smaller companies have websites that suck, have no idea what an AdWords campaign is and think that Six Sigma is some funky new gym program. What’s my point? With very small and not very capital intensive changes, some of these businesses will DOUBLE in size in a short period of time. We just closed a business last week where the owners didn’t have cell phones and didn’t use email, (I’m not kidding). The buyer is young, tech savvy and knows what needs to happen next. He’s already working on a new website. The sellers of this business were charging a general shop rate that I’ve not seen since the 1990’s. Plenty of room for price increases. They have a solid reputation spanning 4 decades. With some minor changes, the buyer will have an ROI that is so hard to find in larger companies.
Let’s Talk Fragmentation
If you’re not convinced, let’s talk fragmentation. It’s that wonderful little word that everyone wants to see when considering a business acquisition. When it comes to small manufacturing companies, the sectors are highly fragmented with few and sometimes no dominant players, depending on the sector. That means gaining market share within a geographic region is easier. If you look at the average age of manufacturing business owners, you realize that most small manufacturing company’s competitors are also approaching retirement. That provides incredible opportunity to scale AND dominate through acquisition. Before you say “scale up” and break into your happy dance…there are some challenges.
What Are The Challenges
While the companies we choose to sell are well run, some in this price range are not so well run. This is why they’ve remained small. Some are exceptional, but remain small as a lifestyle choice. Weeding through the crap can be time consuming and depressing. Consider outsourcing the hunt to those that specialize in manufacturing M&A and look at hundreds of deals a year nationally. Develop relationships with these people, tell them what you need in a business acquisition and be very specific. This is the equivalent of pushing the easy button.
There are incredible manufacturing companies out there that can be dramatically scaled up and provide an ROI not seen in larger companies. They may just not be in the price range you’re accustomed to looking at. Stop looking for manufacturing business acquisitions in all the wrong places. Enlist the help of professionals, push the easy button and move on to your happy dance.
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