Manufacturing businesses have historically been in high demand for acquisition by both entrepreneurs and Equity Groups. Consequently, manufacturing companies such as machine shops, production manufacturing, contract manufacturing, assembly companies, equipment manufacturers, etc have historically seen higher earnings multiples than most businesses. So as an owner of a manufacturing company, how do you capitalize on this?
- Revenue, Earnings, & Growth
The primary driver of business value is earnings, followed by growth. There are many of important factors below that supplement this and help close the deal, but in the end, earnings drive the value. One way to illustrate this is some simple math; for every dollar of earnings you add to your bottom line, the value of your manufacturing business will increase by 4 dollars or more (using a 4X EBITDA multiple). Or a better example, add $100,000 to your bottom line and you can expect an increase of $400,000.
Thus in preparing to sell your business, your top priority should be increasing earnings which is usually tied to increasing revenue. Likewise, if your earnings are at a peak, and you are no longer committed to or interested in growing the business, it is definitely the right time and best time to sell your business.
- Minimize Dependency on the Owner (You)
A key concern of buyers, especially for technical businesses like manufacturing, is the reliance on the owner’s skills and expertise. While a training period is included in most purchase agreements, ultimately, the buyer must replace the seller and be capable of running the operation without them. If the owner is the only person with critical skills required this raises concerns with even prospective buyers with industry experience.
Likewise, if the owner is the primary point of contact with key customers buyers are often concerned about the ownership transition. Will the customers stay, is the relationship dependent on the owner exclusively, will this impact sales?
As you prepare to sell your manufacturing business start delegating more of you daily tasks to your team. This is not suggesting that you should stop running the business, but rather focus on running and building the business, not being the business.
- Financial Records & Statements
The most critical point in selling a business is Due Dilligence. This is where the buyer reviews the company financial statements and tax returns to prove the revenue and earnings are indeed what has been stated. Your company financial statements are the proof of your company’s performance and critical in determining the business value.
To ensure you realize the company’s full value it is important to have all of your financial statements readily available, well organized, and most importantly accurate.
- Procedures & Quality Systems
Having procedures in place gives buyers confidence the transition will go smoothly and the demonstrate the business is not highly dependant on you.
If your company has quality system approvals such as ISO-9001 or 0992, ASD-9100, or NADCAP this demonstrates that your company has well documented procedures for your entire manufacturing and business process from front to back. These quality system approvals also enable your company to provide services to a wide range of companies from industrial to military-aerospace and medical manufacturers providing additional market opportunities for the buyer.
- Customer Concentration
If your company has customer concentration above 30% with a single customer it will be a cause of concern with some buyers and lenders as well. With that said, Pacific Business Sales has sold businesses with customer concentrations above 50%, but it is more difficult and hinges on showing both the buyer and lenders the top customers will stay with the company after the ownership transition. Important factors in for customers with high annual sales percentages are 1) longevity with your company 2) a reason why they buy from your company, 3) why it would be difficult for these customers to change to a new supplier, and 4) showing that the relationship is not dependent on you (the owner).
- Employees, Experience, & Stability
One of the most important assets of your company are your employees and buyers recognize this. Buyers are very interested in both the experience and tenure of your staff. Long tenures demonstrate stability. Well trained and experienced employees are an important part of your company’s infrastructure and again, reduce the dependency of the business on you the owner.
Infrastructure is a broad term encompassing all of the above aspects of a business. Simply put, infrastructure includes the physical facilities, equipment, procedures, quality systems, staff, and organizational structure. Essentially, infrastructure is how your enterprise is organized and operates. To buyers, a company will excellent infrastructure has value because they are buying a well organized and finely tuned profit machine. This reduces risk, simplifies the ownership transition, and ensures stability going forward.
All of these things are important elements of a well run manufacturing company that will sell both for a premium and quicker than a typical manufacturing business. With this in place, when you are ready to sell your manufacturing company, the next step is to contact a business broker with experience in selling manufacturing businesses like your.
Connect With A Business Broker Experienced in Manufacturing Business Sales
To successfully sell your manufacturing business it is important to have a business broker experienced in selling manufacturing businesses. An experienced manufacturing business broker will be familiar with how your business runs, the manufacturing industry in general, the unique aspects of manufacturing financials/accounting (e.g. inventory, WIP, etc), and most importantly be capable of intelligently presenting your business to prospective buyers.
Below is additional information about selling your business. If you are thinking about selling your business contact us for a Free Market Value Analysis. We’ll work up the market value of your company, meet with you to discuss it and the next steps in selling your business.