In recent years, manufacturing business owners are retiring in record numbers. This means if you’re a manufacturing business owner thinking of retirement, you’re not alone. You’ll be competing for quality buyers. In this article, we’ll examine how to best position your company as a premier manufacturing company acquisition to achieve a superior result in support of your retirement.
In Definitive Guide to Preparing Your Manufacturing Business for Sale, you’ll learn 12 crucial steps for preparing your manufacturing business to go to market. Here are the 12 steps, which we discuss in detail below:
Step 1: Understand the Sale Process & Be Prepared to Provide Documentation
Putting your company on the market can be a scary and stressful time for manufacturers. Sensitive information about your company will need to be provided. However, it should be provided in stages and only when a buyer has been both professionally and financially qualified. Understanding the sale process and the timing of the release of information is the first step. Information is power, and the more you have before putting your business on the market, the better off you’ll be. For an overview of the sale process, you can read about the “12 Critical Steps to Selling a Manufacturing Company.”
The first stage of information is needed to prepare a pitch-book on your company to attract offers. A second level of information is provided during due diligence after an offer has been made and accepted. Working with an M&A professional provides an important barrier between you and a potential buyer. They can protect against providing too much information too soon.
The list below includes both initial requirements and information that would be provided during due diligence. It should be noted that it’s incredibly important to respond to pre-offer buyer questions with speed. If buyers don’t get answers promptly, they’ll move on to other opportunities. They will assume that if you can’t answer basic questions promptly, you’ll never be able to get through due diligence.
As an M&A professional serving exclusively in the manufacturing sectors for almost 30 years, I can tell you that this is the area where most Sellers are woefully unprepared. Providing the below information is not optional. It’s required by bank underwriters and all quality buyers. At Accelerated Manufacturing Brokers, Inc., we won’t consider representing a client if he or she can’t provide the items below in a timely manner. Here’s what you need in the documentation and why you need it:
- Three years of tax returns. Most buyers and bank underwriters will want to see a minimum of three years. They’re looking for patterns of growth or decline. If there is an unusual decline or spike in one year, they’ll want to know why and will likely ask to look at additional years. Some Sellers want to go to market after one fantastic year. That’s not always a good idea. Sometimes it’s better to wait to show consistency. Buyers will want to understand if the spike in sales is an anomaly that won’t repeat. You and your M&A representative will have to make the case that the increase is sustainable.
- Three years of financial statements, preferably accountant prepared. If there are inconsistencies, buyers may want to see a longer period of time. Buyers will also want to see monthly P&Ls and Balance sheets in an excel format with one year on a page. In the P&L they’re looking for any seasonality that might exist in the business. In the Balance Sheet, they’re trying to determine the working capital needs of the business. Having the information in an excel format helps future projections and calculating past averages.
- Full documentation on all monies flowing to shareholder, including where these appear on your P&L statements and tax returns. Buyers and acquisition lenders need visibility into the adjusted EBITDA of the business. While the numbers are never the entire story, they are the starting point and always important. Sellers are often confused about what is included in an adjusted EBITDA figure. For instance, in a C-Corp, Seller’s may receive substantial distributions during the year of the prior year’s profits. This is NOT part of an adjusted EBITDA calculation. That calculation starts with your net earnings and adds back interest, taxes, depreciation, interest and W2 earnings. If a number is not in the P&L, it’s not an add back. In the case of distributions, they are distributions of prior year’s earnings, and they are part of the balance sheet, not the P&L. The pitch-book or offering memorandum prepared by your M&A representative will have an adjusted EBITDA chart. You’ll have to provide evidence of every item in that chart during due diligence.
- A list of industries you serve and the amount of income and number of customers attributable to each. Buyers and lenders are looking for sustainability here. If you’re primarily serving industries in decline, they’ll see risk. An example might be companies making components for postage machines in the early ’90s as people were moving to online marketing and bill-paying methods.
- 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. Often buyers will want to see a three- to five-year history of the top 10 customers. They want visibility into whether the relationships are growing or declining. If you serve iconic customers in a sector, the identification of which would not give away who you are, let your M&A professional know this. An example might be Boeing, GE, John Deere, etc. If you’re a service provider to iconic brands, mention should be made of this in the marketing material.
- Aging accounts receivable with written payment term You might have great sales, but if your customers don’t pay or don’t pay on time, the buyer sees risk. In preparation for sale, Seller’s should try to firm up their accounts receivable policies and clean up old balances.
- Aging accounts payable. Buyers are seeking to understand if you’re paying your bills on time. They don’t want to step into a situation where vendors will immediately put them on COD.
- A complete facilities list with make model, age, acquisition date, acquisition price, and service records, preferably in an Excel format. Major pieces of equipment should be supplied early on. However, understand that a complete and detailed asset list will be necessary prior to closing. If an acquisition loan is being sought, there will be an asset appraisal. Providing the list in an excel format makes it easy for the appraiser to do their job and speeds the process.
- A list of all outstanding machine tool loans and other indebtedness of the company. This is required in both stock and asset sales.
- Incorporation papers and evidence that the corporation is in good standing with the state. Seller’s sometimes think this is not needed in an asset sale, but it is. Buyers need to verify that whoever they’re buying from has the legal authority to sell the assets.
- All capital expenditures within the last five years. Buyers will have to plan for future capital expenditures. They’ll look at your history to understand how to plan. If you’ve not made improvements in years, you can expect to receive a lower purchase price offer. Often manufacturing business owners take the view, if it still works, there’s no need to replace it. However, if your competitor is buying a new machine tool that can produce double the parts in half the time, you eventually will not be price competitive and will lose business. Quality buyers love to see owners who are running their business as though it’s not for sale and they’ll pay more.
- A list of inventory, including raw material and finished product. Buyers will want to understand how you’re pricing your inventory. You’ll be expected to be using GAAP accounting methods. Inventory should be priced at the lower of the market or raw material plus labor.
- A list of all insurance policies with costs. During due diligence, buyers will want to see the actual policy to inform on what they should be buying or if coverage might need to be increased, perhaps to include product liability coverage.
- Information on all employee benefits. Buyers need to make sure that what they have planned is comparable or better than what you have in place so they don’t lose workers.
- An employee census includes each employee’s role or position, date of hire, rate of pay, date and amount of the last raise, and expected remaining work life. In the initial stages, employee names are not provided, simply their position. If workers haven’t been given raises in a long period of time, buyers can expect to be hit with additional expenses immediately after acquisition or be faced with losing workers. They also want to see that a majority of workers aren’t close to retirement age, which creates risk for them.
- Information on the real estate, whether owned or leased. Information should be provided on the square footage of the facility, ceiling height, docs, electrical service, and expansion possibilities. If your facility is leased from an unrelated party, they’ll want to see the lease and understand the history of the relationship with the landlord. If you own your building, either through the corporation or a related entity, buyers will want to understand if they will be required to pay substantially more than you were paying. If so, there will be a deduction made to the adjusted EBITDA chart. Conversely, if you were paying an over-market rate and won’t charge that much to a new business owner, there will be an addback to the adjusted EBITDA chart.
- A list of any contracts the company is a party to with suppliers or customers. Any long-term contract with customers and terms associated with them. Were there any special conditions for winning a customer contract like women-owned status or disabled vet?
- If the company’s products are sold through distributors, documentation will be needed on commission rates, sales by distributor, length of relationship, etc. Buyers will want to understand if they’re contractually locked into the relationship. If the buyer is a larger company, they may have their own sales force.
- Information on any certifications held by the company and/or employees. Examples are AS9100 or individual welding certificates. If the certifications are corporately held, the buyer needs to understand what it takes to maintain them.
- Information on all intellectual property, including any patents and trademarks. Intellectual property might not be something filed with a governmental authority. It can also be a proprietary process that you developed. This adds value to a company. Make sure that your processes are documented and ready to share during transition.
- 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. You can expect that a buyer will want to conduct a Phase I environmental study. In some states, this is an absolute requirement to close, even if the buyer of your business is only renting.
Step 2: Train Your Staff to Perform the Same Functions 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 buyers 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: Be Proactive in Addressing the Skills Gap
It’s also important that you have a workforce with substantial remaining work life and that you’re proactive in addressing the skills gap. 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 workforce. Some firms establish apprenticeship programs to address this issue. You can view a recent article on talent acquisition and management in manufacturing HERE.
Step 4: Have Documented Standard Operating 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. Each worker can be tasked with writing each step in the process for the functions they are responsible for. If you’re ISO or AS9100 certified, you’ve already documented your procedures and can use what you’ve previously done. According to Industry Week, ”If properly worded, SOPs will increase efficiencies in work responsibilities by clearly stating what the procedure is and how it should be carried out. Any variations from the procedure will, over time, result in waste with associated increased costs.
Step 5: Clean up Your Facility
Curb appeal isn’t just for real estate. When smart buyers tour 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. They will adjust their purchase offer accordingly. A messy unorganized work environment will also affect your ability to attract quality workers.
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. You will be expected to be following GAAP accounting as it relates to valuing inventory. Investopia reports that “According to accounting standards Code 330-10-30-9 under GAAP, a company should focus on the accounting method that best and most clearly reflect "periodic income." This provides considerable leeway for companies to maximize their after-tax revenues based on inventory costs.”
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 need 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, they’ll move on to a different acquisition.
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, we highly recommend you have a conversation with a CPA who has experience in M&A transactions. Jordan Downey, a partner in the Frankel Zacharia firm states that "Whether you are on the buy or sell side of a merger or acquisition, you will need a CPA who not only is a master of tax law, but also has experience with business structures, valuations, business analytics, and subtle art of the negotiation process. Each merger or acquisition is unique and will have opportunities and challenges that will need to be identified and navigated through. If you have a CPA with M&A experience, they are able to identify opportunities and strategies to make the business sale as tax efficient as possible, and end the end, will result in a larger bottom line. Unfortunately, it is not uncommon for an advisor to miss a technical strategy that would save their client money, because in the end, "you don't know what you don't know".
We've seen experienced firms save clients several hundred thousand dollars in transaction taxes beyond what their local CPA told them was possible. This is one area where a specialist is absolutely essential.
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 a negotiation. Some acquirers will offer you the opportunity to maintain some equity in the deal, thus having a partial liquidity event now, and a second one years later. While this is not appropriate in every situation, if the buyer has a history of dramatically growing businesses, it could work in your favor. You can read more about exit options HERE.
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. You can read more about preparing psychologically HERE.
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. You can read more about the importance of hiring a specialist HERE.
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 350 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 or competitors find 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. Learn more about the importance of maintaining confidentiality HERE.
In conclusion, the sale process is not for the faint of heart. It’s a long process and it can be grueling. Follow the Definitive Guide to Preparing Your Manufacturing Business For Sale, to attract the best quality buyers and offers for your manufacturing business. The more prepared you are, the easier the process will be.
Visit some of our other business selling resources:
Business Valuation: What's My Manufacturing Company Worth?
Maintain Confidentiality While Selling Your Manufacturing Business
How to Get the Best Price for Your Manufacturing Company
10 Important Questions Manufacturers Should Ask an M&A Advisor
5 Major Fears Manufacturers Must Face When Seeking a Liquidity Event for Retirement
If you follow these 12 steps, you’ll be able to...