The questions loom for all successful manufacturing business owners that are entertaining the thought of selling their business; “what is my manufacturing business worth?” “Who will buy it?” “What will happen to my employees?” and “what is needed from me?”
Chances are that since you are looking to sell a manufacturing business, you are asking several of these questions. We hope to provide some clarity into a very merky topic in the manufacturing business community by painting a picture of the current market landscape, The types of business 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.
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Annual Growth
Average growth for the past 3 years
Region
How populated is the region where your business is based
less than 50K people
Between 50K – 250K people
Between 250K – 1M people
Over 1M people
Client Base
Do you have residual customers that makeup the majority of your business?
Over 20% of my business is long-term contracts
Over 75% of my business is long-term client contracts
Management Team
Do you have a tenured management team in place
The new owner will have to hire and train a management team
A portion of my business is run my managers.
My business is entirely run by my managers.
Financial records
How clean are your books and records
Management prepared financials. No depreciation schedule etc.
Accountant prepared, cash based financials. no asset FMV appraisals, etc.
CPA prepared, accrual based financials. Quality of earnings analysis, professional asset valuations, etc.
Asset Base
What assets are needed for your industry
Real Estate
Does the business own or lease its real estate?
Who Will Actually Buy Your Manufacturing Business
When lower mid-market ($5mm – $50mm in revenue) manufacturing businesses do actually receive offers, they are from either a competitor, an acquisition company like Minerva 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.
- If a competitor acquires your business, they 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.
There are a number of occasions where the buyer doesn’t require this from the sellers, although it is rare. The majority of the time they will require the seller to stay on and operate the company and typically to take payment for the business as a percentage of the overall profitability. This is how they limit their risks as buyers.
- If an individual who is already in the industry acquires you, they 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 very difficult task.
manufacturing businesses that are sold via the SBA acquisition loan program are typically under $5mm in revenue. These businesses are more affordable for a small buyer.
Steps to Sell Your Manufacturing Business
When looking to sell your manufacturing business, you may have three or four options. You may have the ability to hire a business broker, to sell the business to a competitor, to sell the business to a specialty acquisition company. Or, to pass the business along to a child in the industry or your employees.
Selling your business with a broker
If you are entertaining hiring a business broker, it is important that you don’t rush into a relationship and that you do your own research on the sales process and on the broker that you are considering hiring. While there are great brokers out there, there are unfortunately a great number of them that are akin to used car salesman.
See if the broker truly is able to understand your business or if they are just playing along. Ask the broker what percentage of their listings actually sell. It is rare for brokers to have any more than 40% of their listing actually sell. In fact, industry average is around 30%. With that said, there are a handful of brokers that sell 80%+ of their business listings.
The listing process will take a month and it could be 6-12 months before you get any bites. As mentioned previously, the majority of businesses do not sell.
Sell directly to an Investment Company
At Minerva, we have built our business around acquiring profitable well-run businesses, many of which are manufacturing businesses. When owners of manufacturing business get an offer from us, they know that their business will actually sell, they won’t have to pay a broker commission and that they are selling to a company that does not want to strip the business down or lay off employees.
Simply put, we have built our business around solving the unique problem of helping owners of manufacturing business achieve liquidity.
What information will you need to produce
If you want to successfully sell your manufacturing business, it is important to know that the buyer will need to know the business inside and out, be comfortable with the operations and know the industry if you’re going to be able to successfully close the deal. If this is an individual, they have likely come from within the manufacturing industry. If they are an investment company like Minerva, they should have acquired a manufacturer previously.
Manufacturing Business Transition and Management Plans
Each manufacturing 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 manufacturing business 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. In fact, most small businesses don’t sell. 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.
Related
If you are weighing your options between selling and continuing to run your business, have a look at our manufacturing business financing article.
Minerva's Team and Focus
At Minerva Equity, we are a small investment group that focuses on providing liquidity to good manufacturing 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.
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)
Manufacturing Business Acquisition Deal Structure
There are five primary compensation methods that buyers utilize to purchase lower mid-market manufacturing 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 manufacturing 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 business buyer could potentially acquire less than 100% of the sellers manufacturing 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 manufacturing 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 for the business.
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 manufacturing 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. Royalties are quite common with acquisition companies that purchase manufacturing businesses, this is because manufacturing companies typically have strong contracts in place and the business buyers want to make sure that those customers stay with the business after the transaction consummates.
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 business management teams and employees.
For more information on what your business is worth, read up on business valuation in our valuation multiples for manufacturing businesses article. Or, start with a complimentary valuation via our manufacturing business valuation calculator.