What Acquirers Really Want to See in a Manufacturing Business

If you are thinking about retiring in the next few years, you may be wondering what it really takes to sell a manufacturing business and attract a qualified buyer who can sustain and grow your business to the next level. Financials are important, but some other areas of buyer scrutiny may surprise you. Remember - What Makes Manufacturing Companies Successful? The Same Things Make Them Easy to Sell.

This post will give you insight into the following key areas that manufacturing business buyers will focus on before deciding to acquire a business and during the due diligence

  • Numbers, numbers, and more numbers
  • Legal and regulatory status and compliance
  • Your plants and offices
  • Customers
  • Suppliers
  • Employees

The Numbers

Manufacturing Business Buyer

Most sellers are surprised and exhausted by the sheer volume of documentation they will be asked to provide for review when trying to sell a manufacturing business. Buyers will be asking to see numbers, lots of numbers, and numbers from every financial angle. There should be no discrepancies -- or a credible, logical explanation for discrepancies. These requests will come from the buyer as well as any banking institution working on the deal.

Reach out to your accountants to have them make sure your books are clean, up-to-date, and accurate. Financials and tax returns should be completely in sync. You may also need CPA help in quickly pulling together supporting schedules and spreadsheets during due diligence. Make a great impression with the first financial information you provide to your buyer so that you inspire confidence and streamline the due diligence period. At Accelerated, we typically ask for three years of tax returns and financial statements before we provide a valuation estimate.

Financial statements and tax returns are important, but buyers will also want to review AP/AR aging and CapEx spending history. After their initial review of your standard financial statements, they may request additional information such as customer profitability, revenue per employee, or manufacturing cost as a percentage of revenue. Your broker will guide you concerning when it’s appropriate to release certain highly sensitive information.

When you can provide this detailed, accurate, and organized information quickly, potential buyers see that you are serious about your intention to sell your manufacturing business and their confidence rises.

Legal and Regulatory Issues and Status

Prepare an organized file that includes copies of:

  • Articles of incorporation
  • All current legal agreements
  • Insurance policies
  • Leases
  • Loans
  • Contracts
  • Asset lists that show date of purchase and purchase price (machinery, vehicles, computer hardware, and software)
  • Employee censuses
  • Marketing materials
  • Documentation of operational procedures
  • Documentation of any recent safety or environmental inspections by regulatory agencies
  • Documentation on any lawsuits or fines against your business

Your ability to provide this information quickly for review will make a great impression and assist you on your way to a speedy closing.

For a more detailed list, see our earlier published article How to Sell Your Manufacturing Business – The Definitive Guide

Your Plants and Offices

Before you actively sell your manufacturing business, you need to look at the enterprise you've grown and tended with fresh eyes. The physical state of your business locations is important, and first impressions count. What will the buyer see when pulling into your parking lot and walking in the front door for the first time? Is your reception area clean, bright and attractive? Your front office area should be clean and as free of clutter as you can manage. Archive old files to a secondary location onsite or offsite, and eliminate stacks of paper and old catalogs.

Production areas should be as clean as your manufacturing processes allow. When buyers see dust, scrap, dirty machinery, and waste on a shop floor, it leads them to wonder if they will have to make significant capital expenditures to position the business for growth. It also leaves a bad impression of shop floor staff.

Scrap metal should not be piling up on the floor. Tools and spare parts should be put away in designated storage locations, not strewn around. Replace stacks of parts catalogs with online access to supplier catalogs for shop floor personnel.

Are your storage areas full of old parts and stale finished goods that you haven’t sold in years? You may try to include these items in your inventory valuation, but buyers will discount them. Get rid of these items before the sale because if you try to screw the buyer on inventory, it may sour the deal negotiations.

Timing of your cleanup activities is critical. Begin to establish the necessary discipline to maintain a clean shop long before you are actively pursuing a sale. If you make too many changes all at once, your staff may begin to wonder if the business is about to be sold.

A manufacturing business buyer also looks around for signs that business assets are properly secured. There should be an appropriate level of controlled access to expensive tools and inventory. Any computers that store your business critical information should be in a secure location and access to software, especially software that holds your books and records, should be controlled with an appropriate password policy.

Customers

Buyers want to see a list of your top customers. You may redact the names, but you need to show the revenue per customer for the past few years so that they can see if there is too much growth concentration and revenue concentration from too small a group of customers. They may dig into customer profitability to see if you have been hanging on to old relationships for too long without trying to make those accounts more profitable.

They will also look into the rate of acquisition of new customers, and they will ask specific questions about any accounts you have lost recently. They want to be sure that your biggest accounts don't hinge on a longstanding relationship with a single customer contact who may leave or retire soon. Be ready to answer questions about any customer complaints, returns, and customers who short-pay invoices.

Suppliers

Buyers want to know if you have backup sources for all your critical raw materials. If you have been using the same suppliers for years, do you evaluate their performance regularly and scout competing sources that may offer you better quality, better price and payment terms? Are your current suppliers large enough to fuel the buyer’s growth projections? If you are currently sourcing raw materials from suppliers outside the US, their pricing may be impacted adversely as trade deals are renegotiated.

Smart manufacturers spec out supplier performance and hold them accountable. A manufacturing business buyer may look at your supplier agreements to see if you are including performance metrics for your suppliers.

Employees

You may not give a potential buyer direct access to your employees before a sale, but they need to fully vet your workforce — it is a critical asset of any manufacturing business.

They will ask you to provide an employee census that will show them the age and tenure of your employees. If too much of your production workforce is nearing retirement, this is a red flag. Refer to How Smart Manufacturers are Closing the Skills Gap – Apprenticeship to learn how smart manufacturers are developing a younger talent pool. They will ask about any EEOC actions against your business, and they will review any recent job postings to see if you set clear requirements for specific job titles. Be prepared to discuss your pay scales and employee benefits/incentives.

Just as revenue concentration in too few customers is perceived as a risk, information and skill concentration in too few employees is a red flag to buyers. They want to see evidence that production, financial procedures are documented, and that you have some sort of structure for training employees. If appropriate to your business, they will ask about certifications and whether you provide any assistance to help employees attain and keep their certifications.

Conclusion

At Accelerated, we work with a fully vetted list of qualified buyers. We know what they are looking for, and we act as your trusted advisor even before we bring a buyer to meet with you. We can help you get ready for this once in a lifetime adventure of successfully selling your manufacturing business.

If you have additional questions, contact us at info@acceleratedmfgbrokers.com.

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