How to Sell Your Manufacturing Business – The Definitive Guide
A Definitive Guide to Preparing Your Business for Sale
In recent years, manufacturing business owners have been retiring in record numbers. With the recent tax reform changes, these numbers will dramatically increase as a growing number of Baby Boomers will seek retirement during a favorable corporate tax era.
If you’re planning to sell your manufacturing business, what this means for you is that there’ll be increased competition and more available acquisitions for quality buyers to choose from. In this article, you’ll learn 12 crucial steps for preparing your manufacturing business for sale.
Step 1: Be Prepared to Provide Documentation
Quality buyers will require from you the information listed in the bullets below. If they don’t get it promptly, they’ll move on to other opportunities. In most cases, the acquisition of a manufacturing company is funded through some form of bank financing. If the transaction is $5 million or less, it will likely be an SBA-guaranteed loan product.
The bullets below describe the items that are required for bank underwriting. This is NOT optional. At Accelerated Manufacturing Brokers, Inc., we won’t consider representing a client if he or she can’t provide the following items in a timely manner:
- Three years of tax returns
- Three years of financial statements, preferably accountant prepared
- Full documentation on all monies flowing to shareholder, including where these appear on your P&L statements and tax returns
- A list of industries you serve and the amount of income attributable to each
- Your top 10 customers and the amount of income attributable to each. Customer names should be removed during the initial stages of inquiry for the seller’s protection – they can be identified as customer 1, customer 2, etc.
- Aging accounts receivable with written payment terms
- Aging accounts payable
- A complete facilities list with make, model, age, acquisition date, acquisition price, and service records, preferably in an Excel format
- All capital expenditures within the last five years
- A list of inventory, including raw material and finished product. For finished product, you should have both your cost and the price you charge your customer.
- A list of all insurance policies with costs
- Information on all employee benefits
- An employee census which should include each employee’s role or position, date of hire, rate of pay, and date and amount of last raise. This is another item that is reserved for a later stage of inquiry for the seller’s protection, but necessary nonetheless.
- Information on the real estate, whether owned or leased
- A list of any contracts the company is a party to, whether with suppliers or distributors
- If the company’s products are sold through distributors, documentation will be needed on commission rates, sales by distributor, length of relationship, etc.
- Information on any certifications held by the company
- Information on all intellectual property, including any patents and trademarks
- A list of all software products used by the company and the transferability of same
- Information on any prior environmental testing done on the premises
In most M&A transactions, the finance company and the underwriters will also request additional data. The items above are simply the baseline requests that are typical of all deals. They need to be provided in an electronic format, and items such as inventory and machine tool assets should be in excel so that they can be appraised quicker.
Start the Process Now to Sell Your Manufacturing Business!
By filling out the Seller Form, you will get the following:
- Free consultation with a broker specializing in selling manufacturing businesses
- Free valuation of your business
- Advice and tips on next steps
Step 2: Train Your Staff to Perform the Same Function You Do
Quality buyers see danger in making an acquisition where the business is overly dependent on the shareholders. Make sure that you have team members who are trained to do sales, quoting, and other functions typically performed by the shareholders.
Many sellers are reluctant to train people and “let go.” However, doing so will alter both the quality of buyer that will engage with you and the ultimate sale price of your manufacturing company. A well-trained staff tells a buyer that the business can easily be transitioned to a new owner.
Step 3: Your Staff Should Have Substantial Remaining Work Life
It’s also important that you have a workforce with substantial remaining work life. If your entire team will be ready to retire shortly after you, the buyer’s entire investment could be at risk. If your staff is aging and you want to sell your manufacturing business, it’s imperative that you begin to hire and train a younger work force. Some firms establish apprenticeship programs to address this issue.
Step 4: Written Systems and Procedures
Staying on the subject of transition, quality buyers like to see a company with written systems and procedures. The existence of an updated operating manual that includes instructions on all critical company operations is essential to provide a buyer with a comfort level that the company is well organized and will not be difficult to transition. This might seem like a mammoth project if you don’t have an operating manual, but it really isn’t if you involve everyone.
For instance, in my company, each team member is responsible for clearly documenting his or her key functions so that others can step into their role during vacation time. Their job documentation, together with general company policies, comprise our operating manual.
Step 5: Clean up Your Facility
Curb appeal isn’t just for real estate. The most common buyer of lower middle market manufacturing businesses today are executives leaving corporate America. When touring a facility, they want to see a neat, clean, and well-run operation. If you’ve got piles of metal chips on the ground, the buyer interprets it as “you don’t take care of your machine tools.” This leaves buyers with the impression that substantial capital expenditure might be necessary to maintain sales.
Some types of manufacturing processes are messier than others, but when you’re preparing to sell your manufacturing business, your shop should be the best it can be. Some shops have volumes of unnecessary paper, old catalogues, and information that’s easily accessible online. Get rid of everything that isn’t essential to create a more aesthetically pleasing environment.
Step 6: Clean up Your Inventory
If you have inventory or customer parts on your shelf that are stale and unsellable, deal with them before putting your business on the market. If there haven’t been any sales of certain parts for years, an acquirer won’t want them and won’t pay for them. Trying to squeeze out extra money in a deal by sticking the buyer with old inventory will have a negative impact on your deal negotiation, as well as on your relationship with the buyer.
Keep in mind that most deals require some form of seller financing. The buyer will have something to sink his teeth into on the back end if you screwed him on the inventory. Don’t ruin your developing relationship with a buyer by stepping over dollars to pick up pennies. It will hurt you in the long run.
Step 7: Clean up Your Books
Cleaning up your books is required for several reasons. First, if you have receivables that will never be collected, get them off your books. What’s reflected on an aging receivable needs to be a real receivable.
Next, your P&Ls need to MATCH your tax return. If they don’t, you’ll need to have your accountant provide a reconciliation between the two documents. Any discrepancies between the two needs to be logically explained. The importance of this can’t be overstated. You can have everything a buyer is looking for by way of desired sector, sales, customer concentration, operating systems in place, and more, but if they can’t reconcile your books, you’re toast.
Accountants sometimes do gymnastics to help their clients avoid taxes. While that might be good for you in the short term, it will hurt you in an M&A transaction if your documents don’t match.
Step 8: Become Current on Taxes
When you sell your manufacturing company, you’ll be required to prove that you’re current on your taxes, payroll, and other financial obligations. If there are any issues, get them cleaned up—otherwise you can expect to have some of your sale proceeds escrowed pending the receipt of clearance documentation.
Step 9: Understand the Tax Consequences
In order to understand the tax consequences of the sale, you should have a conversation with your CPA prior to listing your business. You need to make sure before you enter into the M&A process that the likely net proceeds will be sufficient to fund your retirement.
Step 10: Establish Your Post-Closing Role
Be prepared to discuss what you want your post-closing role to be. How long are you willing to remain with an acquiring entity
for training and transition and under what terms? Is your family on board with this plan? Make sure to have these things settled in your heart and with your family before entering negotiation.
Step 11: Prepare Yourself Psychologically
This is the part no one tells you about, and it’s difficult to prepare for. For founder-led organizations, the emotional aspect of exiting a company that has been part of your identity can be extremely challenging. Sellers who prepare themselves mentally for the change ahead of time fair better. Those who develop other interests, hobbies, and especially some sort of philanthropic or mentoring work prior to selling stay happier and healthier during retirement.
Step 12: Research and Hire a Specialist
During the time your company is on the market, you need to concentrate on running your business. Research and hire a Manufacturing M&A Specialist to market and sell your business. This will free you up to keep your business on track during this critical time. A specialist will provide exposure to the best manufacturing buyers nationally.
The process of vetting buyers, both professionally and financially, is incredibly time-consuming. A specialist can manage the process while maintaining confidentiality until it’s determined if a candidate should be granted access to any company information. At Accelerated Manufacturing Brokers, Inc., we typically vet between 200 and 250 buyers and bring fewer than half a dozen to a facility before it goes under contract, usually with multiple offers.
Ask about a firm’s vetting procedures before engaging with it. For most manufacturers, if employees of competitors found out that the business is being sold, the consequences could be devastating. A good M&A intermediary or manufacturing business broker will be a shield between you and your competitors, tire kickers, and financially unqualified buyers. Visit our 2019 article about 6 Critical Steps HERE.
If you follow these 12 steps, you’ll be able to...
Successfully Sell Your Manufacturing Business!
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Start the Process Now to Sell Your Manufacturing Business!
By filling out the Seller Form, you will get the following:
- Free consultation with a broker specializing in selling manufacturing businesses
- Free valuation of your business
- Advice and tips on next steps