Financing options for manufacturing businesses
If you are looking to recapitalize or take out a loan to run or grow your manufacturing business, there is a 95% chance you will fall into at least one of these three categories:
- You have a productive manufacturing company but you’re struggling to pay the bills
- You have made the mistake of taking out a merchant cash advance loan and are now looking for ways to pay it off and refinance your business.
- You have a thriving business, you want to continue growing it and need a moderate loan in order to do so.
The first two situations are the most common and almost always lead to the business owner selling, so that is what we will focus the rest of this article on. If by chance you have a thriving business and you are looking for a moderate loan to grow it, the SBA has a number of exceptional programs for business owners like you that should be available at your local participating bank or credit union.
So you are choosing to move on
If you have been entertaining the idea of selling your manufacturing business, chances are you have been underwhelmed by the transparency in the industry. One article tells you it’s difficult to sell, your advisor or broker may be telling you that it will be easy. All the while you have no idea what your company is worth and have to continue running it in the meantime.
We compiled this article to give business owners in the lower mid-market (small-mid sized businesses) some clarity into the sales process and present them with their options.
Selling with A Business Broker
Selling with a broker is the most traditional route and likely still the most popular. Business brokers sole job is to consolidate your financials, create a comprehensive sales packet, present the business to potential buyers, secure offers, obtain financing and help transition ownership.
There’s a problem. There are statistics in the industry that show that less than 30% of small-mid sized businesses actually sell. A publicly traded business brokerage in the UK published it’s financial records. A pair of wall street analysts diagnosed the numbers and were able to show that over 80% of the businesses revenue came from charging business owners listing fees, NOT from closing deals.
When examining these numbers, along with other information compiled by BizBuySell.com, it was clear that brokerages made almost all of their money by attempting to sell businesses and very little by selling them.
We don’t want to discourage business owners from selling with a broker or hiring professionals to help with the sales process, we simply hope to inform them on the realities of how illiquid most businesses are and to select a broker based on their track record, not the valuation they promise you.
We put together an article to inform sellers on the valuation multiples for manufacturing businesses in hopes that it will help them make informed decisions.
If you are considering selling your business and would like to learn a bit more about what to expect, check out our Guide to selling your manufacturing business article.
Who would buy the business?
When businesses actually do sell through brokers, they are typically small businesses (under $1M) that sell to either a competitor or someone who has been in the industry for some time but has not owned a business.
The SBA offers favorable financing terms for creditworthy buyers on US based businesses that have clean books and records, are growing and have transparent tax returns.
How long will the process take?
Best case scenario is the sale takes 8 months. From exit planning, consolidating books and records, creating a sales packet marketing the business and receiving offers, the process is labor intensive and doesn’t have a clear end in site.
However, we have looked at businesses that have been on the market for 2-3 years and not seen any suitable offers. Keep in mind that the majority of businesses listed with brokers actually do not sell.
What can I expect to pay my Broker, Lawyers and Accountants?
If the broker is actually able to get you a deal, you’ll pay them around 10%. Lawyers and accountants will likely bill you hourly and their fee will vary widely based on their expertise and the size of the project. A rough estimate is $10K for an attorney and another $10K for the accountant.
Sell to my employees
If selling with a broker sounds like a daunting task and you believe your employees have earned a shot at owning the business, you can potentially sell the business to them. Of course, you’ll likely have to make some concessions on the terms you accept for the business. Perhaps your employees can pay you out for the business over 5 years.
At Minerva, we believe we have come up with a unique structure to acquire businesses. That structure includes: cash at close, fixed quarterly payments, retained equity and a royalty.
Continue to run the business
Depending on the size of your business and how reliant it is on your skillset, you may be able to step back from the operation and hire a manager to run the day-to-day. There will still be tasks that need managing so you will never be fully retired, but this option can provide some freedom and continual payment.
Sell to Minerva
At Minerva Equity, we have constructed an investment model that we believe combines the best of the above options.
In our typical investment we pay cash at close, fixed quarterly payment for 3-5 years, a royalty while the seller continues to operate the business for some time and a percentage of the equity. In most cases, we also grant a small percentage of equity to the business employees.