GillAgency

How To Sell My Manufacturing Business

How to sell your manufacturing company

The basic steps required to sell any business is pretty much the same. We have written a very detailed step by step guide on what it entails to sell a business. You can read it here. We urge that you do spend some time reading that article first. Now, every industry has some nuance. It is important to factor in those nuances during the sale of a business. In this article we will discuss what manufacturing business owners will have to do additionally.

Manufacturing businesses are seeing record transactions

Manufacturing companies, especially in the small to medium sizes are seeing record mergers and acquisitions. There can be a few definitive reasons. Baby boomers are exiting businesses. Manufacturing is going through rapid disruption with the advent of automation, artificial intelligence and robotics. Private equity firms, search funds, and independent sponsors are seeking out manufacturing companies with good history and requiring transformation.

We have seen this from our experience, industry reports and also from requests by our large database of buyers. Typically the deal-size for the small to mid-market manufacturing industry can be split into a few buckets. These are -> under $1M, between $1M to $5M and greater than $5M. This classification is primarily based on the buyer profiles as well as the source of funds to make such acquisitions. The strategy, planning and execution of a deal in each of these tiers are slightly different. This is especially true over the last 10 years. Below you will find detailed steps on how to sell a manufacturing company. These steps are common to all the tiers we have mentioned. There will be nuances which we will cover in subsequent articles. You are always welcome to reach out to us anytime to discuss specific needs.

Steps to sell your manufacturing business

These are the most common steps to sell a manufacturing business with excellent results in the fastest possible timeline. The average time to sell a small to mid-sized manufacturing business is about 6 to 9 months. Motivated sellers have also managed to see exits in 12-16 weeks and we have made such deals happen in the past. If you are able to complete a lot of these steps prior to listing your manufacturing business for sale, the timeline can be significantly shorter and the price you will get will also be higher. We can vouch for this from our decades of experience buying and selling manufacturing companies in the small to mid-market sectors.

Valuation of your manufacturing company

Valuation

It is important to ascertain your company’s “fair” valuation. This need not be the listing price, although most of the times, it is the listing price. A fair valuation takes into account several things. These are (a) cash flow of your business, (b) expenses that you can add back to your bottom line (to reach a discretionary cash flow), (c) industry multiples, (d) comparables, (e) goodwill, (f) asset valuation to name a few. Without a proper valuation you will not have a benchmark to start with. You will find it difficult to defend you price to buyers, lenders, funders, consultants and brokers of buyers. Being extremely confident of your company’s valuation shows that you are an experienced seller. That will also fetch premium buyers that will pay higher multiples.

Manufacturing businesses will have both tangible and intangible assets in the books. Depreciation and Amortization schedules will have to be clean with proper explanations and assumptions. You can increase the valuation of your manufacturing business by taking these as add-backs. However, without a proper schedule and basis, you will find yourself painted into a corner during negotiations. If you are not sure how to do a fair valuation please feel free to reach out to us. For all our clients we offer no-obligations free valuations.

Do tax planning prior to selling your business

Tax Planning

Most business owners leave tax planning to the end. They get caught up in all the work that needs to get done during the sale process. We have seen many times that sellers have not done any tax planning. In the end, they end up shelling out a large portion cash after closing. Most small business owners do not have the time, nor the interest in doing their own taxes. They hand it over to their accountant or “tax guy”. As such their knowledge of business taxation is not clear. This is by no means a ding on business owners. Most business owners do not need to know the ins and outs of taxation. But it is extremely important to know the different tax implications on the sale of a business. This is true especially if you are trying to sell your manufacturing business on your own.

Manufacturing companies typically use different depreciation models and schedules as opposed to say a technology company. Assets are valued differently. So if you are signing up for an Asset sale as opposed to a stock sale you will have different tax implications. We always recommend that you hire tax consultants and attorneys that understand these nuances. If you are not sure you can always reach out to us. We are happy to refer you to our network of tax consultants and attorneys.

Do exit planning before listing your business for sale

Exit Planning

Exit planning is a key step to selling any business. It is even more important when you are trying to sell a manufacturing company. Manufacturing companies have a lot more moving parts. But most business owners do not want to spend too much time time on planning. They live to execute tasks and hit deadlines. There are circumstances during a business sale where such speed is necessary. But for most of the sales, a few extra weeks of planning will make a big difference.

In fact good exit planning is critical to achieving good results from a business sale. Manufacturing companies have hard assets and a supply chain system that needs to be properly cleaned up, dressed and marketed. We have written a detailed article on how to do proper exit planning. We urge that you read this resource and also reach out to us to discuss specific issues or concerns.

Build your exit team

Exit Team

At GillAgency we believe that business owners can sell their business on their own. However, we also believe that they should not go at it by themselves. You have to continue running your business. In fact, you need to keep generating excellent business results. Especially in a year when prospective buyers and lenders will be scrutinizing your business and its future. We always recommend building an exit team. You will definitely need legal and accounting. Additionally you should bring key personnel from your business into the team.

We always recommend that you hire consultants and advisors. GillAgency has vast experience in providing such advisory. Please feel free to reach out to us. You can also read our resource on how to build a winning team to help sell your business. Manufacturing businesses have more roles and responsibilities than other types of businesses. MRP, Logistics, Warehouse, Compliance, Procurement, Inventory management – these are critical roles that will need representation during the business sale process. A well-written CIM and good data room creation can greatly reduce all the risks associated in this step.

Ensure your manufacturing company is compliant

Compliance

Most manufacturing businesses will have some sort of compliance and standards. For example, toxic waste disposal, environmental guidelines for manufacturing, material procurement standards, supplier verification processes, machine operation safety regulations, incident management standards, workman’s comp and other legal and compliance should be up to date. If there are gaps which are difficult to fix in the short term, you should highlight them. Do not hide them as they will pop-up later and cause more problems. Provide proper explanations on why they cannot be fixed right away. Explain risks they will pose and cost implications to a new owner. If you have certifications you should definitely highlight them.

We understand that there is a cost to being 100% compliant. Small business owners may not even know about all regulations. However, it is important to research and understand all regulatory laws in your industry. This is extremely important prior to listing your business for sale. GillAgency has a lot of knowledge across a vast array of industries in the manufacturing brokerage space. Our large network of consultants, buyers, academia and government contacts allow us to present a large body of knowledge to our clients. You are always welcome to reach out to us to discuss your business and industry.

Detail out all SOPs of your manufacturing business

Standard Operating Procedures

The critical area where we see a lot of manufacturing companies struggle is standard operating procedures and policies. If you have a shop floor it is critical that you have basic policies and procedures mapped out, displayed and readily available. Every industry will have its specific set of policies and procedures. Some of these will be required by law. You must have these signed by all your employees and even vendors and partners that come under them.

It is beneficial to have an online resource to manage your SOPs. There are several systems and online software that allow you to manage your SOPs. If you have nothing setup, it is not difficult to get these completed. Start with searching them online. Do not blindly copy or plagiarize as it will come out easily during due diligence. You can use these sources to adapt to you business. You can then map out your internal processes in flow diagrams and save them in PDF formats. There are many software systems that allows you to create such process flows (microsoft visio, draw.io, lucidchart). If you are really strapped for time, you can draw them on paper and scan them into PDF documents. Remember to save all your SOPs in an online repository (SharePoint, OneDrive, DropBox, Google Drive).

Clean up inventory

Inventory Management

You must clean up your inventory – physical inventory as well as all records. Ensure you have your counts matching your books. If you have made inventory adjustments that are material to the financials you must have proper explanations. A lot of companies will take inventory adjustments to inflate their gross profits. It will be caught very easily in due diligence.

Remember, in a business sale there are several eyes on your business and you books – the buyer, their broker, their accountant, the lender, the lender’s underwriter, SBA consultants. It is near impossible to have something slip by all these parties. One red-flag will not only delay the sale, it will result in buyers walking away. Most buyers will use it as a negotiating point. We have seen so many times, a seller making out-of-the-ordinary inventory adjustments mid-year. They claim that they had to do it to get the business ready for sale. It never works. This is one of the reasons why you ideally plan to sell your business at least a year before you do so.

Assess the locations of your business

Locations

If your industry and business relies on your location, then make sure you have presented the pros and cons. You much present that properly in your offering memorandum. For example, there can be a competitive advantage to being close to a reputed supplier. But if your supply lead times are long, then you should explain how you manage demand forecasting. Or, if your primary customer base is not close then you should discuss strategic shipping relationships. That may allow you to keep a remote cheaper location, and service a diverse customer base.

The important point here is that you should discuss about your company’s geographic location. Most buyers would like to understand how easy or important it is to relocate the business. If it is not possible or it will greatly impact the performance of the business, it is better to highlight that so that only local buyers are interested in your business. It is no point wasting a lot of time with buyers only to find out that they will not be interested in your company because it cannot be relocated.

Clean up warehousing processes before selling your business

Warehouse management

If you have a warehouse then it is important to ensure that your warehousing processes are well documented, clean and managed. At a minimum, ensure your receiving, put-away processes, picking, packing and shipping processes are properly managed and documented. For receiving it is good to have a proper inventory management system, labor management system and other ancillary processes like dock schedulers and pallet management. In your put-away processes, you should demonstrate how you have optimized the movement of suppliers to optimized locations. Use of slotting, storage management and space management techniques should be highlighted. For storage it is best to ensure that you have the proper key performance indicators (KPIs) set, measured and analyzed. For picking you should have a good item maintenance and classification and in packing your items should have proper dimensions, weights and measurements.

Lastly for shipping, you must detail out the process, all 2PLs, 3PLs and any company that you are using and how they are integrated with your business and your systems. We understand that small businesses may not have the luxury of implementing expensive software, but before you start to sell your business, you should definitely document out your processes and try to clean up the warehousing processes as best as you can.

Assess all your computer systems

Manufacturing Software

List out all your computer systems and ensure they have the necessary security updates and upgrades. If you have any legacy software, you should discuss the continuity of the system with your prospective buyers. We have seen systems written in the late 1970s which do not have any more support and the vendor is no longer in business. In such cases we advice our sellers to spend some time to map out the processes and flow chart out the operations. This can help a buyer send that to a software company to see what it would entail to upgrade the systems in case they do not want to use the legacy software anymore. Better still, you can do the same and provide estimates to buyers on what it would entail to upgrade your legacy software.

If you have up-to-date systems, then ensure you have detailed out integrations and process management. Keep a list of users, access rights, user accounts and any security audits that you have done. Ideally your accounting systems should be integrated with your manufacturing systems. If not you should document how you book your accounting journals from your manufacturing systems and processes. We tell our sellers to provide a list of systems that are used in the industry and explain how their business systems and implementations keep them lean and competitive.

Clean up all supplier relationships before listing your business for sale

Supply chain

You should have all your supplier contacts and contracts in place. It is important to keep a historical record of all suppliers, as far as back as you can trace them. This shows a good supplier management process. If you have a very important supplier relationship and that is a competitive advantage, you should definitely highlight that and explain why that is a competitive advantage. On the flip side, if you are very reliant on a sole supplier or a small number of suppliers you must explain how that is relationship is protected and can be transitioned to a new buyer.

Ideally it is best to have a healthy mix of suppliers across different regions – some drop ship, some contract and some sole suppliers. However, that is almost always not possible, especially for small business owners. As such we always advice our sellers to focus on the contracts and agreements, along with a historical record of the relationship. If you have supplier management reports like late shipments, pricing breaks, inventory lead times, backorders, buy-backs etc., you should highlight them.

Assess and demonstrate strong logistics, distribution and shipping capabilities

Supply chain

You have to ensure that all your shipping and distribution records and processes are well documented. If you have a 2PL, 3PL or 4PL managed logistics then ensure that you have all contracts up-to-date with historical records. It is also important that you have detailed records on all vehicles, their book values, depreciation schedules and maintenance records. Companies that use Fulfillment by Amazon or other similar distribution companies, it is important that you explain how they can be a competitive edge to your industry as well as discuss the risks. A good buyer will always want to see the risks labeled out as well as explanations on how to manage the risks. Risks can be managed by either mitigating them or even transferring them (e.g. buying an insurance policy or outsourcing the risk).

Copyright

If you have protected your company and investments through patents, copyrights or intellectual property (IP), then you should definitely highlight that. More importantly, the records should be up-to-date and readily available. If there are patents then you have to be careful on how they are transferred to a buyer and as such you have to work with your attorney on the legal frameworks for such transfer of patents and IPs. While a buyer will always ensure that such assets are transferred correctly, we have seen many cases where these have not been done correctly only to result in a lot of headache post-sale for both parties. If you have created patents that give you competitive edge you must properly valuate such assets.

There are several valuation methods that will definitely increase the value of your company. They will depend on the industry, the life of the patent, the coverage of the patent and several other factors that should be taken into factor. A good patent attorney (or your patent attorney) should be able to provide you better guidance. You can always reach out to us and we can help you with our valuation process and legal networks. You should also ensure all legal documentation of your business, starting from formation, articles, EIN, acquisitions and investments (if any) and all the way to customer, supplier and partnership contracts, are up-to-date and in place with historical records.

Tidy up shop floors across all locations of your company

Shop floor

You should be prepared to have prospective buyers walk through your shop floor. We always say that tidy up your shop floor as if you are going to go through a quality audit (for example ISO). Definitely clean up anything hazardous or anything that can look dangerous. A clean and tidy shop floor signals a well-run operations. Ensure you have safety and regulations up on big signs and charts across the shop floor. Label everything and have your manufacturing team ready for inspection. It is best to rehearse the inspection – what you want to highlight more than others, what needs to be discussed further, why certain processes have to be done in a certain way and how the shop floor arrangement is a competitive edge as well as will help in scale and growth.

Does your manufacturing business own real estate?

Real Estate

If your business owns real estate, you should spell out clearly if the real estate is part of the sale and the price or not. If it is part of the sale and not in the price you should definitely provide a market value. We have seen many offering memorandums where real estate is part of the sale but there is no market value provided. For a lot of buyers this is a big turn-off – we know because we have spoken to thousands of buyers during our decades of experience.

Provide a basis for the real estate valuation. We recommend you hire a neutral party to do the appraisals. You can always ask for more because of locational or historical advantages. If the real estate is not part of the transaction, you should explain how depreciations will impact the buyer’s books post-sale. We always try to be proactive in our approach because it saves a lot of time and headache during due-diligence.

Prepare for due diligence

Prepare for due diligence

We have written a detailed article on what you need to do to prepare for due diligence. It is so important to prepare for due diligence before you list your business up for sale. We have seen at least half of all business sales end up getting abandoned or not reaching their full potential because of issues found in due diligence. These could have been easily avoided with a little preparation, planning and fixing.

At a minimum for your manufacturing business, you should prepare for good buyers to visit your warehouse(s), shop floor(s), meet with your key supplier(s), talk to your key employee(s) and go through all your company’s documents and financials. We always tell our clients to be prepared for a full-fledged audit of their company. While that may sound scary, it is actually not that difficult if you sit down and plan for it. The alternative is not good because you will leave a lot of open ended issues which will greatly reduce your chances of finding a good buyer with a good deal. Remember an LOI is only a document that has intent. The real purchase agreement happens only after a successful due diligence.

Market your manufacturing business for sale

Marketing a business

Once your manufacturing business is ready for sale you will then work with your broker (if you have recruited one) or with your marketing team to market your company. Typically this entails first creating a CIM (confidential information memorandum). We have written a detailed article on how to create a CIM. You can also download a free CIM template from our resources.

Next, you will create a “teaser” which is basically a redacted executive summary of the business. We have a huge buyer database from decades of being in the business and if you work with us we will market your business to all our buyers. Additionally we will list your business in the top classifieds. These include BizBuySell.com, BizQuest.com, BusinessBroker.net, LoopNet.com, BusinessesForSale.com, BusinessMart.com and a few more. You are welcome to list your business teaser at these. However, we have seen that good buyers will typically work with brokers because they know that experienced brokers will make the buying process much smoother for all parties, saving everyone time and money.

Obtain letter(s) of Intent from prospective buyers

Letter of Intent

Typically if the business has been marketed properly and there is a good active buyer database that you have access to, you should receive interest within the first week. Prospective buyers will reach out to inquire about the business after reading the teaser. Based on that they will sign an NDA and get the CIM. A good broker should be able to answer all buyer questions and satisfy the buyer. Most buyers will want to have a screening interview with you. The screening interview is your chance to pitch your company. You cannot over-sell your business because good buyers will do their due diligence in time. So do not feel shy to talk up your business and your achievements. Focus on the high points and touch up on the weaknesses. Remember to read your CIM before your interview because the buyer will have that in-front of them.

Based on the interview the prospective buyer will send you a letter of intent. We always try to get multiple letters of intent for our sellers. Buyers will try to force an exclusive LOI, which means that the business have to be taken off the market during the due diligence process. We always try to negotiate a non-exclusive LOI. This may not work with very good buyers who will try to negotiate a shorter due diligence in return for an exclusive LOI. The best case scenario is that you receive multiple LOIs with short due diligence periods (30 days is excellent, 60 days is normal).

Go through due diligence during the sale of your business

Due Diligence

Due diligence trips up a lot of business sale, especially manufacturing companies. There are a lot more moving parts to a manufacturing business than say an online business. Online businesses have a lot of intangible assets which poses other challenges. Manufacturing companies in the small business sector, on an average, go through a 60-90 day due diligence period, although we have seen 30 day due diligence as well. Of course this will depend on the size and complexity of the company, but we always advice our sellers to negotiate a due diligence period that is no more than 60 days. You might be able to negotiate a non-exclusive LOI if more due diligence is required. In that case your business can still be marketed to other buyers.

Remember, most buyers will come with a lender who will do their own due diligence of your records that they receive from your prospective buyer. Be ready for a financial audit if your books are not solid. You can read our detailed article on what happens during due diligence, what to watch out for and how to successfully complete a due diligence of your business. For a manufacturing company, it is important to list out additional items in the LOI in the due diligence section – how inventory, warehouse and manufacturing processes will be inspected and audited.

Sign the purchase agreement

Purchase Agreement

Congratulations on getting through due diligence! The next step is to hire your closing attorney. We always recommend you get an attorney that has done mergers and acquisitions for manufacturing businesses. There are nuances to the transfer of assets, liabilities, patents, goodwill that will have a lasting impact for both the buyer and the seller and unless you have an experienced attorney that has done a lot of these deals, you are at risk of legal exposure post-sale.

A purchase agreement can have a lot of pages and legal language – at a minimum you will have the terms of the purchase (most likely it will be an asset purchase as opposed to a stock buyout), indemnification clauses, non-competes and any transitional agreements like continued consulting for owners. For a typical small business transaction for a manufacturing company, expect to see 40-50 pages in a purchase agreement. Most purchase agreements will have the buyer escrow a “good faith” deposit (typically $25K to $50K depending on the size of the transaction).

Closing of the sale of your manufacturing company

Closing

A closing date is set once the purchase agreements are accepted by buyer, seller, buyer’s lenders, lawyers and brokers. Lenders will almost always control the closing date. It is important to keep working with your buyer and their closing team to motivate everyone to move towards a close. We have seen transactions sitting for 2 months even after the purchase agreement has been signed because the lender has not been able to schedule closing. Closing typically happens at the buyer’s attorney. However, a lot of closing happens remotely as well, especially if the different parties are present in different geographical regions.

At the close, funds are escrowed with the buyer’s attorney and asset exchange hands. You will see cash hitting your bank account once the signatures are completed. Expect to do wet signatures – so if you are not present, you will have to courier signed agreements. Congratulations – you just sold your business!

Transitioning your manufacturing business to your new buyer

Transition

Post sale transition and integration is another area that trips a lot of sellers and buyers. It is extremely important to set the expectations for transition before purchase agreements are drawn. During the sale process both buyers and sellers go through a courtship and things are almost always rosier than they will be during the transition period. Skeletons will come out, personalities will clash and ownership will hard to let go. It is therefore important to “play out” the transition before the close. We actually sit and rehearse a possible transition course – what happens on day 1, week 1, month 1 and so on. This will almost always change a few things in the purchase agreement. In cases where there are earn-out clauses or even seller financing, it is absolutely critical that you put all the transitional clauses in the purchase agreement.

Remember to have termination clauses that are agreeable by both parties. There are a lot of elements to a good and successful transition. Selling a business does not end at the closing table, it really ends once a buyer has successfully taken over the operations – sometimes that can take a year or longer depending on the size and complexity of the business.

Conclusion

Selling any business can be a daunting task. This is true especially if you are looking to get top dollars for your company. Finding the right buyer that can continue on with your legacy should also be a consideration. Selling a business is not a complicated process at all. We have a lot of resources that have helped many business owners break down the steps. There are many brokerage firms and consultants who try to create a sense of doom with smoke-n-mirrors. At GillAgency our goal is to bring 100% transparency to the business sale process. We want to give business owners all the information before they decide how they want to sell their business.

We firmly believe that you can sell your own business. The only caveat is that you must have 6-9 months of full-time effort of you and your exit team. Most business owners do not have that luxury. That is where boutique commission-only firms like us come to your service. We have sold several manufacturing companies across different industries. So we know the challenges and nuances which we can defend with buyers as well as their lenders. We also help our sellers stage and clean up their business before they list their manufacturing companies up for sale. That is the only way to attract the premium buyers and get the best value for the business. One red flag leads to a domino effect of questions, inspections, doubt and fear. That leads to a lot of wasted time and money.

As such we highly recommend that you speak to us before you start selling your manufacturing process. Please access all our resources to educate yourself on the selling process as well. We look forward to hearing from you.

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