Selling a manufacturing business
After a period which saw much manufacturing sent to cheaper alternatives overseas, there has been a resurgence in the demand for domestic products. This reversal of fortunes has helped push up the price of manufacturing businesses and is great news for any owner contemplating selling their organisation.
However, not all companies are equally valuable, and some will be more sought-after, and thereby command a higher price, than others. In this guide, we will outline what makes one manufacturing business worth more than another, advise how you can help increase the price of your company, and explain each of the stages involved in a sale.
Determining the price
There is no fixed formula for the value of a business, it is worth what someone is willing to pay. As an owner, it’s up to you to make your company look like the most attractive proposition possible ahead of a sale. To command the highest price, it’s best to begin this process months, or even years, ahead of your expected sale.
Buyers pay a premium for a successful business that is likely to return healthy profits in coming years. Strong turnover and profits in recent years and a solid standing in the marketplace are all helpful indicators. It’s also important to demonstrate that there is potential for further growth, whether this is with new product lines, entering new markets or increasing production capacity.
While there are no certainties in life, it always helps to be able to show strong ties with both suppliers and customers. On the other hand, try not to rely too heavily on too few organisations. It hurts the value of your business to be in a precarious position if one walked away, and a change of ownership gives organisations the perfect opportunity to do just this.
When pricing your business, the three key factors will be your fixed assets, your inventory and potential earnings in future years. Equipment is only as valuable as it is useful to your company’s future. A buyer won’t be interested in paying a premium price on machinery that doesn’t contribute to future operations, no matter what you paid for it.
You can improve your cashflow situation in the years leading up to a sale by reducing non-essential purchases. New machinery, senior management recruitment hires and research and development projects are all long-term investments that will put a dent in your bottom line. Let the buyer take responsibility for that spend, they’ll be the ones reaping the rewards after all.
For homegrown businesses, the danger always looms that a cheaper alternative can be found abroad. It’ll be tough to command a high price if customers can easily buy overseas, or the potential buyer can set up operations in a more affordable location. Play to your strengths: domestic manufacturing businesses have much shorter lead times with lower shipping costs, can have far greater levels of customer service, and are able to guarantee higher levels of quality control. Proving your organisation has a good reputation in these areas can allay fears of potential buyers.
The sale process
As you see, there are a great many factors that make up the price of a business, and some can take months or years to put into place. With any luck, you’ll have the luxury of time and will be able to begin your sales process long before any deal is agreed.
Alongside calculating the desired price of your organisation, you should work with a business advisor to determine your own personal goals for a sale. This could be the biggest up front price, the best value over a sustained period of time, a quick exit, a staged exit, or a combination of factors. It’s important to set your objectives early as this can influence who you sell to, the final price, the deal structure and will affect how much tax you’ll be liable for once the deal is done.
Once your price range is set and your goals have been defined, it’s time to search for a buyer and prepare for their due diligence.
Searching for a buyer is a tricky situation. The more interested parties there are, the more demand will drive up the price. Yet publicising that your business is up for sale can cause uncertainty amongst staff, suppliers, customers and creditors. This may cause some to walk away, or renegotiate terms less favourable to you, and this could cause the wheels to fall off the whole operation right as you’re heading down the home straight.
To avoid this, a broker will not only be able to use their existing industry contacts to cast the net far and wide, but they will also be be able to market your organisation confidentially.
While this will allow potential buyers to read a prospectus about your business without knowing who it relates to, at some point in the process you’re going to have to open up your business to intense scrutiny.
This process, due diligence, means allowing a serious bidder to put all aspects of your company under scrutiny, including legal and financial documents, your environmental records, HR, health and safety, valuation of your assets, and whatever other questions they want to ask to ensure they know exactly what they’ll be buying.
This is an essential part of the sales process and the best approach is to prepare as much as you can in advance and be open and honest about the good parts as much as the shortcomings. If a buyer finds something you didn’t warn them about, it will seem as though you tried to hide a secret, that’ll damage your credibility and give them opportunity to negotiate the price downwards.
Following due diligence, it’s time to negotiate a deal. Final price is not everything, deal structure can have a huge impact in how much money you receive overall and affect your tax standing. Work with your business advisor to ensure the deal suits you, or better still, allow them to negotiate on your behalf. An experienced advisor will have years of experience buying and selling businesses to draw on, as well as being able to leave emotion out of the process.
One final decision you’ll need to make is how you exit the company. It’s not uncommon for buyers to request you stay on for a transitional period. Agreeing to this will not only increase your chances of a sale, but you can negotiate fair compensation for your time and expertise, too. In some cases you may need a quick exit, but be warned this may look to a potential buyer like you’re trying to cut and run!
Manufacturing businesses are exceptionally complex beasts and the process of selling one for a fair price is riddled with complications. Whatever stage of the sale you’re at, from planning a sale in the future to already negotiating with a buyer, contact BTG Corporate Finance for specialist advice and a free consultation.
Martin has nearly 20 years’ corporate finance experience specialising in advising owner managed businesses. Martin has considerable experience advising on business sales as well as management buy-outs and acquisitions across a wide range of sectors and deal sizes.