Baby boomers who own a business in the manufacturing industry can benefit from learning more about selling, buying, and merging. Preparing a viable exit strategy ahead of time can help these business owners maximize the value available for their manufacturing enterprise. Delving deeper into industry insights and best practices is how many baby boomers realize a greater return on their investment into the manufacturing business.
Considering an Exit Strategy
Divesting a manufacturing business is complicated and comes with a number of technical issues one doesn't encounter in the service sector. One of the leading issues making this business model more complex is the conversion of raw materials and the distribution of products to global markets. Compared to the service sector, owners of manufacturing enterprises take on more business risks, have more invested in capital equipment, and have a more highly-skilled workforce.
For some manufacturers, the value of the enterprise can be negatively affected by imports from places like China and Mexico. This is a stark contrast to retailers and service companies who deal mainly with local customers. For smaller manufacturers with a niche, owners benefit from documenting evidence of how they're able to protect their market share. The price for the manufacturing business is heavily influenced by what you do better than your competitors.
Preparing to Sell a Manufacturing Business
Baby boomers serious about selling a manufacturing business need to prepare it for market beforehand. These owners also need to anticipate and address any potential surprises or problems buyers could encounter. Unknown factors and risks typically discount the purchase price for a manufacturing business. Buyers are interested in tangible justifications for the investment and definable quantities. If the business is to be offered, take care of potential issues prior to going to market.
The amount of future earnings anticipated is the leading factor in determining the market value of a manufacturing company. Market expansions, new product releases, and improved efficiency can typically be used to justify an uptick in projected profits. If there have been poor earnings in the past, they should be discussed in the sales presentation. When the manufacturing business is distressed, buyers may wonder how profitable they will be in the future.
The best bet is to honestly identify or discuss the potential pitfalls, and offer buyers a strategy for corrective actions they can take in the future. However, buyers already experienced in manufacturing are more likely to be understanding of the potential headwinds involved with the turnaround. Once the manufacturing business is put on the market, you can expect it to take six to twelve months to sell.
Qualifying Potential Buyers
Potential buyers typically include competitors, employees, individual investors, private equity groups, family offices, and strategic, synergistic or corporate investors. If the potential buyer is a competitor, owners should be wary of divulging any sensitive information that could be used adversely if the deal does not materialize. There are many more corporate, strategic and synergistic buyers who have specific acquisition programs as a method to expand. Once you're committed to the idea of selling, prepare the business and follow the advice of trusted advisors.
Valuation for Manufacturing Businesses
Due to the complex production operation, owners should enlist someone with expertise in manufacturing finance to head the appraisal process. The valuation of a business is often affected by the buyer and taking critical insights from the data. It's best to avoid valuations based on the market and criteria from the industry. When you use aggregate valuation, goodwill, inventory and fixed assets like real estate and equipment are also included.
Goodwill includes the part of the sales price exceeding the net fair market value shown on the balance sheet. The goodwill is often considered the value that can be attributed to excess earnings over and above the anticipated earnings. Goodwill is paid for over and above the asset value. Goodwill is the differentiator and will be the profit resulting from the sale of the company.
Recasting Manufacturers' Historical Earnings
You can recast historical earnings in an attempt toward establishing a more accurate value of your earnings. This helps adjust for owners' compensation while eliminating and discretionary and extraordinary transactions. Recast earnings help identify the difference between the earnings reported to the IRS and actual earnings of the manufacturing business. Recasting historical earning is the foundation for more accurately projecting future earnings.
Before purchasing a manufacturing business, buyers typically want to perform their own due diligence to substantiate the valuation. This research typically includes verification and an analytic review of the manufacturing operations. Therefore, it's important that owners perform their own due diligence to identify potential problems before putting the manufacturing business up for sale. If the buyer discovers the issues first, the more likely they are to try and discount the asking price. It is critical to consider reverse due diligence on the buyer to assure they are qualified, both financially and from a management perspective.
Structuring the Deal
Aside from prepping rebuttals and resolution for open issues, you should also consider the different options available for structuring the deal. You can divest a manufacturing enterprise by selling off the business assets or corporate stock. Selling corporate stock is preferred by many sellers, but the tax advantages must be considered by both parties. Many transactions are asset sales where the assets are liquidated and the liabilities are resolved at the transaction date. There is always a large consideration related to inventory, its accuracy, its value and how it is included as part of the deal.
Considering the Finances
Some buyers will need sellers to help finance some of the transaction, while others will bring outside financing to the table. Before putting the manufacturing business on the market, the terms should be considered and understood. If you agree to take stock in exchange, be sure to perform the appropriate due diligence on the buyer as well. If you open to accepting installments, understand that these are most likely going to be made from the future earnings of the buyer's manufacturing operation.
You should also consider the tax implications or exposure that results from the type of sales transaction. Prior operating losses, the structure of the deal, installments and the type of organization are all factors that affect taxation. All the tax planning should be completed before executing the deal because you can't reverse the consequences once the transaction is finalized.
Anthony Citrolo is a partner of NYBB Group, LLC.