You have built a manufacturing business, and you are ready to exit. We designed this guide to help you understand the road ahead and give you the tools to sell successfully and maximize the value you receive for the business you created.
The first step in selling any business is to get a good understanding of how buyers will value it. The challenge for you is to approach valuation from the lens of an outsider. What your manufacturing business is worth to a buyer will hinge on its financials.
There are several methods for valuing a business. Traditional income-based methods include discounted cash flow and capitalization of earnings. For businesses with no profit potential, it may be as simple as tallying up the assets and liquidating at "book value."
In practice, though, most buyers and business owners rely on a market-based approach to business valuation.
Almost all business owners, buyers, and business brokers will center their valuation on a range of earnings and revenue multiples. This practice helps make the market more effective for everyone by getting initial valuations in the same range.
Pricing multiples are derived from the sales price and financials of comparable businesses that have already sold. By aggregating "comp" data, buyers and sellers can calculate market multiples to use to benchmark businesses that enter the market for sale.
These multiples vary by industry, sector, and market, so as you get closer to offering your business for sale, you will need to get access to detailed, local "comps." That means getting access to confidential data on sales of manufacturing businesses in your market. Starting out though, it helps to look at industry averages to get a "back-of-napkin" price range.
|
Manufacturing Category |
Cash Flow / Earnings |
Sales / Revenue |
|
All Manufacturing Businesses |
3.07 |
0.72 |
|
Auto, Boat and Aircraft |
3.18 |
0.73 |
|
Chemical Products |
3.19 |
0.98 |
|
Clothing/Fabric |
2.51 |
0.49 |
|
Electronics/Electrical Equipment |
3.15 |
0.79 |
|
Food Products |
2.86 |
0.63 |
|
Furniture/Fixtures |
2.75 |
0.61 |
|
Glass, Stone & Concrete |
3.17 |
0.61 |
|
Industrial Machinery |
4.20 |
0.80 |
|
Lumber/Wood Products |
2.84 |
0.58 |
|
Medical Devices/Products |
3.25 |
0.85 |
|
Metal Products |
3.70 |
0.89 |
|
Oil & Gas Production |
3.36 |
0.63 |
|
Paper and Printing |
2.49 |
0.63 |
|
Rubber and Plastic |
5.11 |
1.19 |
|
Sign Manufacturers |
2.77 |
0.66 |
(For more on how multiples are used and where they come from, see Using Pricing Multiples to Value a Business for Sale.)
Earnings and cash flow are used interchangeably in the business for sale marketplace, and both generally refer to Seller’s Discretionary Earnings (SDE). SDE is simply the full financial benefit the owner derives from the business.
Manufacturing businesses sell at an average earnings multiple of about 3. This means an "average" manufacturing business that earns its owner $250,000 a year will sell for around $750,000. Of course, there is no "average" manufacturing business, and each business will be worth a higher or lower multiple depending on the specific characteristics of that business (more on that in the exit planning section below).
Earnings or cash flow multiples are the most relevant metric to use, because buyers base decisions on an expected bottom line ROI, espescially considering manufacturing businesses tend to generate some of the highest average owner profits. Still, it may be helpful to look at top-line revenue multiples. This may provide insight into reported profit margins of sold manufacturing business, and you can see how your company stacks up.
Manufacturing business revenue multiples typically range from about 0.5 to 0.8, with the average at 0.70.
Median revenue reported in our manufacturing business data set is $1,100,000, and median earnings is $254k. That gives us an average SDE margin just under 24%. Again, SDE is essentially net income + owners salary.
Clearly, you will need organized financials on which to base your market value. Buyers and business brokers will look for the past three years of income statements, balance sheets, tax returns, and your Seller’s Discretionary Earnings statement. Your accountant is the best person to prepare these documents.
You hired all the people necessary to build a manufacturing company, now you need to determine who you should hire to sell it.
Selling a manufacturing business is a complex process, and you will want to make sure you have experts with the skill sets necessary to close the deal at terms that meet your needs. There are three (maybe four) main experts that you should consider adding to your team.
Before giving financial details to prospective buyers, you will want to execute a non-disclosure agreement. Each letter of intent will need a legal review and you will need legal guidance during due diligence. You will want a thoughtful financing agreement and ironclad promissory note if you’re financing a portion of the sale. These are just some of the reasons you need a lawyer you trust, and that’s before getting into the actual purchase and sale agreement.
Manufacturing businesses tend to have complex financials and drawn out cash-flow timetables, so you probably already have an accountant. Make sure he or she is advised in advance of your intention to exit. You may need to make some adjustments to how you operate, shifting from a tax advantageous strategy to one that emphasizes bottom-line earnings. You will also need to iron out a Seller’s Discretionary Earnings Statement (for valuation purposes above) that will hold up against scrutiny.
Depending on the size of your manufacturing business, you may want to consider a professional business appraisal. Appraisals can be helpful for very large businesses that need a well-documented valuation analysis, or businesses that have not operated long enough to have usable earnings history. For many "Main Street" businesses with values under $1MM, you may want to save on fees by conducting your own market valuation, along with a knowledgeable business broker or M&A advisor.
Most business owners will want an intermediary to facilitate the selling process from start to finish. Selling a manufacturing business involves a lot of specialized knowledge and having someone who is close to the market daily can make all the difference.
What’s the difference between a business broker and an M&A advisor? It’s really about who they market their services to. Both are intermediaries that function to help business owners find buyers and negotiate transactions. Business brokers tend to serve "Main Street" owners (revenue under $5MM) while M&A advisors focus on lower middle market (revenue of $5-50MM).
Of course, both charge a commission, but for most owners, the cost is far less than the upside of maximizing value attained when the deal is done.
Additionally, a broker or M&A advisor can provide a market valuation and pricing analysis so you can save on the appraisal costs.
Once you understand the primary levers of your businesses value, you can begin making changes to improve the business’s appeal to buyers, improve the price, and most importantly, set it up to run without you.
The sooner you begin readying your exit, the better positioned you will be come sales time. Once you list your manufacturing business for sale, and begin qualifying buyers, you should anticipate at least 6-12 months before finalizing a sale. You would also include a couple of years to get your manufacturing operation in an ideal shape for buyers to evaluate.
All-in a three-year time frame would be ideal, but often external factors don’t allow for that much lead time. Set a proposed sale date as far out as is reasonable given your particular circumstances, but be aware that if you put yourself in a position to need a quick sale, it will be difficult to avoid having to accept a reduced price.
If you’re anything like most small business owners, much of your operating procedures and maybe even financials are not well-documented. To promote the value of your manufacturing business, it’s important that all financials and pertinent information regarding how your business operates is documented and well-organized, so that an outsider can quickly evaluate it and compare it to other manufacturing businesses.
This means having three years’ worth of income statements and balance sheets that line up with the same year’s tax returns. You will also want to document important details like customer lists with sales histories, supplier lists, material cost history tables, employee list and high-level hiring/turn-over trends, equipment suppliers and maintenance details, and any other important items that materially affect the performance of your business.
It’s not likely you will be able to suddenly double your earnings to improve the price of your business, but you may be able to make changes to the operation of your business to get a better multiple on your earnings. Try to consider how a buyer might evaluate your manufacturing business and find opportunities to improve its appeal. Here are some factors that may help you view your business like an outsider would:
|
Improves Price Multiple |
Reduces Price Multiple |
|
Reliable and well-documented operation: organized financials, detailed operating procedures, reliable & documented supplier relationships, etc. |
Opaque or ad hoc operation: Messy or non-existent bookkeeping, high-churn supplier relationships, undocumented "handshake" agreements, etc. |
|
Modern/efficient production equipment. |
Antiquated or lower technology production equipment. |
|
Low customer concentration: Manufacturers that sell to a long list of customers have lower perceived risk. |
High customer concentration: Manufacturers whose revenue heavily depends on a small number of large customers appear more risky. |
|
Little stale inventory. |
Large inventory of unsold stale product. |
|
Experienced, tenured employees unlikely to leave after the sale. |
Family or friends running the operation that may leave when owner does. |
|
High A/R turnover: Effective credit and collection policies means buyers don’t have to try to affect change with customers. |
Low A/R turnover: Long A/R time frames that necessitate cash flow financing are common in the manufacturing industry, but not ideal. |
|
Operations management in place. Ideally owner focuses on high-level strategy, not daily operations. |
Owner manages daily operations – remember you want to sell a business, not a job. |
|
Balanced product portfolio – reasonable number of discrete products with good margins. |
Unbalanced product portfolio – too few products expose the business to risk, and too many may complicate production and inventory management. |
|
Seller financing: Owners willing to finance a portion of the sale and keep some "skin in the game" fetch higher prices. |
Cash only: Sellers who insist on all cash will usually have to accept a lower offer and will receive fewer offers in general. |
Between individual entrepreneurs, strategic buyers, and private equity firms, manufacturing businesses are always in-demand. The work is to get your business in front of enough buyers to generate competing offers. At the same time, most manufacturers looking to sell don’t want to advertise that their company may change ownership for fear of spooking employees, customers, or suppliers.
If you’ve engaged a business broker, you will rely on them to market your sale while maintaining confidentiality. Your broker will create a "blind listing" on sites like BizBuySell and BizQuest, and have an NDA at the ready for anyone interested in looking into the details of your business.
Most businesses are sold in confidentially, so don’t worry about missing opportunities by keeping the sale of your business close to the vest. If, however, yours is a notable manufacturing company with a unique history or special community status, you may gain exposure by making your plan to sell public. Getting word into local news media or trade outlets can get your sale in front of businesses not necessarily looking.
You can expedite the process by informing trusted business associates of your intention to exit. You may even want to inform competitors or related business owners with whom you have a good relationship. The more interest you generate, the greater the chance of finding a good buyer that values your business as much as you.
Once you’ve found the right buyer, you will need to ink down the details. Price is always going to be the main point of contention, but you will also need to set boundaries on seller financing terms (if any), training, duration of your stay, assets to include, working capital, and a lot more.
It’s important to remain as dispassionate as possible during negotiations. Like any business owner, you are deeply invested in your manufacturing business. Emotions need to be kept in check. Accept that the buyer and brokers involved are going to look for every advantage and attempt to get the best terms possible for themselves. Pick your battles and refrain from sinking the deal at this stage over otherwise small details.
Give a little where you can and hold where you’ve established your limits. Every point, however small, is an opportunity to show good faith, so look for ways to assure the buyer that you’re willing to meet their needs as well as yours.
Remember that these deals do not come together every day, and you don’t want to risk losing what may be the best opportunity to make a successful exit.
Get our free Guide to Selling your Small Business for an in-depth guide that will walk you, step-by-step, through the process of valuing and selling your manufacturing business.
