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Best Prepare Your Manufacturing Business for Sale

About 25% of the manufacturing workforce is 55 or older and thinking more and more about one thing with each passing day: getting out.

Are you one of them?

Given the number of small business owners reportedly looking to flip their life’s work after building it from the ground up, you could be. The motivations vary. Most commonly, the reasons manufacturing owners want to cash out include:

  • Timing for Financial Gain: Choosing the right time to sell can significantly impact the deal’s success. In manufacturing, market trends can heavily influence the value of your business. For example, a surge in product demand can considerably elevate your company’s worth.
  • Succession Challenges: Many small and mid-sized businesses, especially in manufacturing, need help with succession. Without a ready successor, selling becomes a practical and often necessary decision.
  • Personal Motivations and Burnout: Sometimes, the decision to sell is deeply personal. A shift in interests or a decline in passion can lead owners to explore new avenues and seek opportunities that align with their evolving goals and aspirations.
  • Financial Reasons: If the business is highly profitable, selling it can provide a significant financial windfall for the owner. Conversely, financial challenges might force an owner to sell.
  • Desire for New Opportunities: Some business owners sell their existing business to free up capital and time for new ventures or opportunities.
  • Regulatory Changes: New regulations or changes in industry standards can increase the cost of operation or require significant investment to comply, prompting owners to sell.

You want a smooth, regret-free process when you sell a manufacturing business, regardless of whether you’re selling to a strategic buyer aiming for vertical integration or a financial buyer like a private equity firm with an eye on restructuring or resale. Studies show that three-quarters of business owners regret selling their business within the first year because they think they could have done better at closing.

Here are some proven suggestions from former Big Four experts that can protect against seller’s remorse when negotiating with potential buyers. 

Create a Comprehensive Business Plan

Your finance team must prepare and present a comprehensive business plan that forecasts what the business will look like over the next three to five years.

This plan should illustrate the potential for growth and scalability and give an overview of current cash flow and supply chain. Businesses with well-defined growth strategies attract higher valuations. This plan could include a market analysis demonstrating future demand or plans for incorporating innovative technologies, increasing a business’s competitive edge and market value.

Businesses are often valued based on their current or adjusted earnings (EBITDA / adjusted EDITDA) and a multiplier or discounted cash flow techniques that complement the multiplier approach.

Demonstrate Your Financial Health

The financial health of a business is a crucial indicator of its long-term value. That’s why getting your books in order with accurate financial information is essential to showcase your company’s current financial performance.

Clean, transparent, GAAP-compliant financial records, including quality of earnings can significantly increase a company’s valuation. This detailed recordkeeping should include evidence of profitability and growth potential in conjunction with your business plan. Businesses with clear and comprehensive financial statements are more likely to attract serious buyers and receive better offers.

Legal and Tax Preparedness

Legal and tax considerations play a significant role in the sale of a business. A thorough legal due diligence process can uncover potential liabilities, enhancing a business’s sale value. Effective tax and estate planning is also crucial to optimize the seller’s after-tax return from the business sale. The goal is to ensure all aspects are well-managed to maximize the final cash proceeds to the seller.

Ensure Environmental Compliance

No buyer wants to inherit environmental liabilities. That’s why showing compliance with environmental regulations is a legal necessity and a potential strong selling point. Several organizations, including the Environmental Protection Agency (EPA), report that companies that adhere to environmental standards are often viewed as more responsible and sustainable, enhancing their attractiveness to environmentally conscious buyers and reducing the likelihood of regulatory setbacks.

Create a Compelling CIM

A Confidential Information Memorandum (CIM) is vital in the sale process. According to the National Association of Certified Valuators and Analysts, a well-prepared CIM that details the business’s value, financial data, market position and potential can be a decisive factor in negotiations, helping to achieve a successful sale.

Risk Assessment and Mitigation

Identifying and mitigating risks is crucial for making a business attractive to buyers. A thorough risk assessment and a plan to address identified risks can streamline the sales process and increase the business’s market value.

Adapt to Industry Trends

Demonstrating adaptability to industry trends, such as automation or sustainable practices, can significantly enhance a business’s appeal. Businesses that proactively embrace industry changes and operational efficiencies are seen as more innovative and forward-thinking, traits that prospective buyers value.

Show Your Technological Edge

Highlighting specialized technologies, patents or proprietary processes can set a business apart in a competitive marketplace. The Intellectual Property Office emphasizes that these unique assets can be a significant differentiator, attracting buyers interested in acquiring innovative technology or exclusive market rights.

Selling a manufacturing business is not a short-term process. It’s often a long-term game— on average, around seven months, but far longer in some cases. Be prepared to make the best data-driven decision for your manufacturing company and come out with a result that you’ll look back on without regret, knowing you maximized its value and secured a future that aligns with your personal and professional goals.

Build an Effective Management Team

Potential buyers value the quality of the management team to ensure a smooth transition and an on-going focus on successful continuing operations. Make sure they know their numbers including key performance indicators, sales drivers, cost structure and capital investments, among others. Define effective systems and processes.

(Gary Cardamone, MBA, is a director at CFO Consulting Partners. He supports the firm’s manufacturing and distribution practices and has more than 30 years of expertise in the manufacturing and engineering sectors.)