The questions loom for all successful business owners that are entertaining the thought of selling their business; “what is my business worth?” “Who will buy it?” “What will happen to my employees?” and “what is needed from me?”
We hope to provide some clarity into a very merky topic in the business community by painting a picture of the current disposition market landscape, The types of buyers, options the buyer has in how to operate the business, what the various roles of the seller might be and how we at Minerva have a different structure that we believe makes us a unique fit for some businesses.
Minerva's Team and Focus
At Minerva Equity, we are a small investment group that focuses on providing liquidity to good businesses run by great people in the lower mid-market. We define the lower mid-market as businesses with under $10M in annual profit, although we typically focus more narrowly on those between $2M – $5M.
If you are new to the landscape of buying and selling businesses and are looking to gain a greater understanding of it, we suggest you start by reading our small-mid sized business sales article.
At Minerva, our goal is to provide an attractive exit option for owners of manufacturing businesses that meet our criteria.
We have selected manufacturing among a small number of other industries to work with based on a number of factors, including the fact that they are unattractive to traditional investment companies (private equity, search funds & family offices primarily)
Who Buys Manufacturing Businesses
Manufacturing hit it’s stride in the industrial revolution and although it has undergone many changes, Manufacturing will always exist in some form or fashion. However, While it may be a reliable industry, it is not a sexy one.
Typical investment firms primarily look to acquire businesses with low fixed costs that they have the potential of scaling. For this reason, the market for mediocre software businesses is 10x larger than the market for exceptional, asset-heavy manufacturing businesses.
When lower mid-market manufacturing businesses do actually receive offers, they are likely to be from either a competitor or a professional that already works in the industry, has had success and saved some money and is ready to use it to put a down payment on an acquisition.
The former of these two will likely want to place contingencies on the deal structure, pay the seller throughout 3-5 years and ask the seller to continue running the business for 1-3 years.
The ladder may be able to utilize SBA acquisition financing to close the deal on favorable terms for both the buyer and seller. If the buyer has proven their ability to manage businesses in the sector and is able to obtain financing,
this could be the optimal deal structure for the seller because they can get a cash close which is very seldom otherwise. While the SBA acquisition structure often makes financial sense, actually finding a buyer and closing the deal can prove to be a difficult task.
Manufacturing Business Management Plans
Each business seller we meet has a different motivation to sell their business. Among the most common are; retirement, sickness, desire to have a more balanced life, get involved in philanthropy and volunteer for non-profit organizations.
In similar fashion, there is also a wide spectrum of what sellers are looking for in the ideal acquirer. Among the common requests sellers seem to look for; The highest amount of total compensation, the highest amount of cash at close, someone who will take the business above and beyond what it currently is, someone who will be a fair and trustworthy boss to the companies employees.
While each seller may have their own archetype in mind that they would like the buyer to fit, they almost never have the luxury of selecting a buyer from a pool of multiple offers. Among the various plans a buyer might have for the business are: liquidate all of the assets. Or, lay off the majority of the employees and take their client book of business.
These plans are straight out of the “corporate raider” playbook from the 1980’s and is almost always done by a competitor. From this competitors perspective, they are simply paying to remove competition from the market and acquire their clients in the process.
While this has historically been a common practice in the manufacturing industry due to its high levels of assets (liquidation value) and residual clientele (ongoing revenue stream), it is not common to see this practice in the lower mid-market where companies don’t answer to shareholders, don’t have corporate acquisition teams and don’t have access to capital markets in order to finance an acquisition with the same ease that their larger peers do.
Manufacturing Business Acquisition Deal Structure
There are five primary compensation methods that buyers utilize to purchase lower mid-market businesses. While it is the most ideal scenario for the seller to receive a cash payment, it is highly unlikely to come without being financed by the SBA.
A down payment made to the seller that is payable at close is the most straight-forward way of buying a business. Adequate capital to make a down payment on businesses is ultimately what holds many potential buyers out of the market.
Retained equity is another commonly utilized compensation structure. A buyer could potentially acquire less than 100% of the sellers business and leave them a piece of the business to keep them compensated as a shareholder ongoing. Being as though the seller is looking to sell their business, it is unlikely that they will want to retain more than 15%-20% equity in compensation for the business.
A seller note is common in the lower mid-market. This is a debt that is held by the seller for a typical period of 3-5 years while the seller makes periodic interest and principal payments.
A holdback is the most common deal covenant and is utilized on the vast majority of transactions. A holdback is a portion of the agreed upon purchase price that is not paid at deal close. Instead, this payment is made once a certain criteria is met. This criteria could be a length of time or performance threshold that the business needs to meet.
A royalty is a straightforward payment that is taken out of gross revenue and paid directly to the seller of the business. While this is not commonplace across the acquisition landscape, it is common amongst deals where the seller is asked to run the business for a period of time after close. A royalty lends itself to this situation because the seller gets performance based compensation and the buyer still gets to maintain the equity rights.
At Minerva, we have all of these deal structures and more in our tool belt in order to find a structure to equitably align risk and aggressively compensate sellers, their management teams and employees.
For more information on what your business is worth, read up on how valuation multiples for manufacturing businesses work. Or, start with a complimentary valuation via our manufacturing business valuation calculator.