The biggest retirement mistake manufacturing owners make is waiting until they want to be retired. A sale takes about a year and a half, so start early. Here's what to do three years out, two years out and in your final year.
Why Retirement Planning Starts Years Before You Retire
No matter how much you love running your lower-middle market manufacturing company, there will come a day when you start thinking about retirement. The biggest mistake I see owners make is waiting until they want to be retired before they begin planning.
Selling a business starts with a valuation and ends with a new owner taking over. If you're very lucky, you might sit down at the closing table in six months. On average, it takes about a year and a half. And for the owners who start too late, it sometimes doesn't happen at all, which means the retirement they planned never does either.
The secret to retiring on time is early planning. I understand why it gets pushed aside. When you're focused on growing the company and "someday" feels a long way off, preparation is easy to put off. But owners who neglect it often watch their retirement plans fall apart. If your ideal exit date is within five years, start now.
Start With Your Retirement Date and Work Backward
My advice is simple: begin at the end. Ask yourself:
- When would I like to retire?
- What does my ideal retirement look like?
- After I sell, how long am I willing to stay on to help the new owner?
Your answers set the clock for everything else in this guide.
How Long Does It Take to Sell a Manufacturing Company?
Even with an M&A advisor who truly understands your business and your sector, selling a manufacturing company to the right buyer takes time. Valuation, marketing, buyer vetting, facility tours and closing typically run 12 to 18 months from start to finish. The more prepared you are on day one, the faster that timeline moves.
Many owners also underestimate how much work goes into getting the company ready to be valued well. Related reading: How much is your manufacturing business really worth? Our valuation guide walks you through it.
Here is something I tell owners plainly: the best manufacturing M&A advisors won't spend their time on a company that isn't ready to sell. To get the outcome you want, there are several things to complete before you ever call an advisor. That's why I put together this countdown.
Your Retirement Countdown Timeline
- Three years to go: Prepare your key documentation
- Two years to go: Get your facility and management team ready
- One year to go: Research the market and your advisor options
- Year 0: Retirement, ideally somewhere with spotty cell service
If you're ready to start the sale process now, schedule a consultation today.
Three Years Out: Prepare the Documentation Buyers Expect
Retirement is about your goals, but to reach it you have to think like a buyer. Buyers want a long, clean paper trail, and building it is your first task.
Expect buyers to ask for:
- Financial statements. Buyers typically want three or more years of clean P&Ls and balance sheets, and today they often go further and ask for recast financials that show your true earnings. They are looking for seasonality, working capital needs and how steady your cash flow really is. If you have old receivables you will never collect, write them off now. A buyer wants to see a customer base that pays.
- Capital expenditures. Qualified buyers want an owner who has kept investing in the company to improve processes and stay competitive. If you've let critical equipment age and figure that's the next owner's problem, it will come out of your price. Outdated machine tools tell a buyer that their future cash flow will go toward replacing them. Run the company with the long term in mind, right up to the day you sell.
- Standard operating procedures. This is simply good business, whether or not you're selling. But writing SOPs is not the same as having your team follow them. Buyers can tell when a binder was put together for show.
- Customer and supplier concentration. Buyers look closely at how much of your revenue depends on a handful of customers, and how much of your supply depends on a single source. Know these numbers before they ask.
Is Your Next Generation of Workers in Place?
Buyers see risk in an aging workforce, and owners often tell me that new trade school graduates don't arrive with the right skills. That gap is also an opportunity, especially if your shop uses newer technology like robotics and automation. Here's how smart manufacturers are closing the skills gap.
Two Years Out: Get Your Facility and Management Team Ready
This is the year to focus on making the company attractive to a buyer. How your facility looks and how ready your team is both affect the number you walk away with, and that number is what funds your retirement.
- Clean up the shop. Buyers notice when a company neglects its assets. A machine shop with chips on the floor raises doubts. A clean, organized facility says you take pride in ownership and care for your machines, which tells a buyer there will be less maintenance and fewer capital expenditures ahead.
- Reduce your dependence on you. When the institutional knowledge lives in the owner's head, buyers see a red flag, and your valuation suffers. This is the year to move that knowledge into your management team and your systems. Developing managers takes time, whether you promote from within or hire from outside, so start early enough to work out the kinks.
For a full walkthrough, read our guide to making your manufacturing business acquisition-worthy.
Plan for Your Role After the Sale
During negotiations, it is very common for a buyer to ask the seller to stay on for a year. They need help getting oriented, and no one is better qualified than you. Think about how that extra year affects your management training timeline, and plan for it. The less the company relies on you, the shorter your post-closing commitment will be.
Your Last Year: Choose the Right Advisor
Selling your company will likely be the largest financial transaction of your life. It can feel overwhelming if you've never been through it, but you don't have to do it alone.
Many kinds of professionals sell businesses. Some are excellent, and some are not. This is the year to do your homework.
- Sell-side investment bankers. An investment banker can assemble a team to prepare your company, but they typically build a controlled auction instead of marketing your company openly. For lower-middle market manufacturers this often leads to a poor result, because only the buyers they invite can bid, and that means qualified buyers get left out. It is the number one mistake I see from advisors who aren't specialists, and it tends to serve the advisor more than the client.
- Generalist business brokers. These brokers don't focus on any one sector. Selling a corner café or a roadside motel is a different job from selling a highly specialized manufacturer. An advisor who specializes in nothing cannot sell your business well, and I'd encourage manufacturers to avoid this group however tempting the commission looks.
- Specialized manufacturing advisors. A sector specialist knows how to value a manufacturing company fully, reach qualified buyers, protect your confidentiality and keep the process moving. While they run the sale, you stay focused on what you do best, which is running your company. Learn how a specialist can help you get the best deal.
Questions to Ask Before You Hire
Just as you'd test drive a car, interview your candidates. Ask:
- What is your fee structure?
- How will you determine what my business is worth?
- Who is the right buyer for me, and how do you vet them?
- How will you keep the sale from disrupting my day-to-day business?
- Who actually negotiates the sale?
Related reading: The guide to valuing your manufacturing business
Are You Really Ready to Retire?
Your retirement likely rides on this one transaction, so before you move forward, ask yourself one last question: "Am I truly ready to retire?"
If you're not sure, you probably aren't ready, and that's okay. Being emotionally prepared to leave is just as important as being financially and logistically prepared. A seller who gets cold feet is a buyer's worst case. Buyers can spend as much as $100,000 on due diligence, and backing out late in the process can carry serious legal consequences for you.
To see what to expect once you start working with an advisor, read our 12-step guide. Then talk with your family, find a few interests of your own and give yourself time to think about what comes next. Selling your company doesn't mean you have nothing left to offer. Whether you picture a long road trip to every national park or designing irrigation systems for a volunteer group like Engineers Without Borders, you have options.
When you're ready for what's next, we're ready to talk. Schedule a no-pressure, no-obligation consultation with our team today.