April 26, 2023 Preparing Your Manufacturing Facility for Sale

Tips that every manufacturing facility owner should know.

By Deniz Mezheritskiy

You’ve owned a small manufacturing facility for the last 30 years, and you’ve run a successful facility. And looking forward as you contemplate retirement a few years down the road, the thought of selling your business may be on your mind.

This is potentially a good time to consider selling a manufacturing business. Consider the large number of baby boomers looking to transition businesses. A  Forbes article states that the number of baby boomer businesses account for 40% of businesses in the United States today, and that 10,000 baby boomers retire each day. In many of these family businesses the nest generation is not always read to step up and take the reins.

That can often mean looking to find an outside buyer.

A Business News Daily article cites freedom, satisfaction and flexibility as among the key reasons people seek to purchase businesses. Prospective buyers can come from several groups. There are the private equity companies wishing to buy profitable businesses. Another group is the executive or “MBA buyer,” typically men and women in their early 50s who have held executive positions, were able to earn some good money and are now interested in a new opportunity.

There are potential buyers out there. If you haven’t investigated this idea in too much detail yet, you are probably wondering how to begin the process.  IBISWorld statistics state that there are more than 718,000 manufacturing businesses in the United States. For those facilities which do change hands each year – whether by an internal transition to a next generation family member, to an employee, or to an outside party – the better prepared the owner is, the smoother the transition will be.

If the idea of selling your business is on your mind, there are a few steps you can take to put your manufacturing business in a stronger position to attract a buyer.

1. Evaluate your facility’s concentration of customers and vendors. Is your manufacturing facility overly dependent on one customer or one vendor? For example, if 40% of your revenues are derived from one client, or if 50% of your raw materials or parts for manufacturing come from a single source vendor, these statistics could cause a potential buyer to be hesitant about going forward. The reason why is that an outside buyer would recognize that the loss of either a major customer or major vendor could alter the profitability of the business.
   You can address these potential red flags by seeing that no one customer represents a significant portion of your overall revenues, and that you have multiple sources (vendors) for materials.
2. The team: do you have a management team/work team in place that will remain with the business after the sale? A prospective buyer will be more attracted to a business that has a team in place to carry the business forward. A buyer can be reassured even further if there are employment contracts in place with key personnel.
3. Maintain strong inventory control.  Be sure that you have a precise knowledge of what inventory you have in stock at any given time. During Covid many companies purchased as much inventory as possible, often overextending themselves by purchasing in bulk – motivated by fear that inventory might not be available in the future. In a competitive negotiation, because inventory is part of the purchase price, it makes sense to have the right amount of inventory in stock – not too much, not too little. Having a strong inventory control system in place will also impress potential buyers.
4. Capital assets: Does your facility need all of the equipment that you are using? The assets on hand can swing the valuation of the business one way or the other. There are significant expenditures associated with equipment. It can make good financial sense to sell or dispose of unused assets before going to market. This practice also contributes to a company’s being more efficient or “lean and mean,” and positions the company better for acquisition.
5. Is your plant involved in significant research and development? Many plants are. Scaling back R&D efforts as you go to market may help to make the company’s profits higher and thereby a more attractive candidate for a potential buyer.
6. Financials: Working with your CPA firm, are your financial reports in good shape? Are the numbers accurate and easy to understand? That is one of the first places a prospective buyer will go – to the company’s financials. How profitable is the business?
7. Is there real estate with the business? If not, and the facility is leased, is there a long-term lease available?  How does the real estate piece fit into the overall picture?

A Business News Daily article cites freedom, satisfaction and flexibility as among the key reasons people seek to purchase businesses. The environment for purchasing businesses is positive, despite interest rates on the rise. Many see the market positively, and understand the advantages of stepping into an existing business with a positive cash flow and a team of employees in place.

As people take a breath after the last two years of Covid restrictions, prospective buyers will find a strong market with many opportunities to purchase businesses across a wide range of industries. We see people on both sides – sellers and buyers – coming out of their shells and giving the market another look.

Denis Mezhiritskiy is present of ROI Corporation, http://roibusinessbrokers.com, located in Rockland, Ma.

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