Continuing our series on, “What Is My Manufacturing Business Worth?” today we’re taking a look at why some companies don’t sell and how to avoid the same fate! A recent industry “Market Pulse” report showed that closing ratios for listed businesses averaged 64%. This average was for the combined total of “main street businesses,” (those priced up to $2 million and for “lower middle market businesses,” (those priced between $2-$50 million.) Other studies place the closing ratio at a much less, 15-25%. The International Business Brokers Association, (IBBA) and M&A Source published the report showing a 64% closing ratio. The fact that the participants are professional brokers may account for the much higher percentage. If you are counting on selling your manufacturing business to fund retirement, it makes sense to find out WHY so many businesses for sale never actually sell.
Before we start, I feel the need to remind our readership not to “shoot the messenger!” My aim is to help our manufacturing clients get the most money possible for their businesses. Sometimes that entails telling you things you may not want to hear. So…have you guessed it yet? The number one reason that most businesses don’t sell is that they are overpriced. In our brokerage division I meet with business owners each week. Many have a number in their head that they hope to achieve. Sometimes that number is more determined by need than by logic or multiples. I often ask how the potential client arrived at their number. Responses range from a “feeling,” to something like adding the original cost of all their equipment to five times their annual sales….at which point I respectfully decline the listing. To successfully sell your manufacturing business you must become educated on industry norms and benchmarks. Sure there are some rare exceptions for companies that have unique products and are positioned to dominate an industry. But the rest of us have to deal with everyday numbers.
The fact is that if your equipment is necessary to the production of the products you make, the value is included, not added to the purchase price. Today’s buyers are savvy and educated. Information on the sale of manufacturing businesses and national averages is a mouse click away. While you’re busy trying to pull the wool over somebody’s eyes, they are already negotiating the purchase of a competing business. Make no mistake, this IS a competition and people are competing for investment dollars. Buyers will place their money where they feel they can get the best ROI. Do you want to successfully sell your manufacturing business? Then you have to know the rules of engagement. Employ combat tactics to position your business above the competition.
In the coming months we will get more into the nitty gritty of how to establish an appropriate sale price. But for now I’d like to move onto some other reasons that businesses don’t sell. These are not necessarily listed in the order of importance, but are often seen specifically in manufacturing companies.
Lack of systems: Buyers want to buy a business that can easily be run. Systems make this possible. Think of it this way…if you were suddenly absent from your business, would a person standing in for you be able to find everything they need to keep the business running? If your key staffer walked out and you had to hire someone new, is there a company “bible,” to light the path for the new employee? If so, you’ve got a step up on the competition when it is time to sell. If you’re business appears so complicated to a potential buyer that they can’t imagine how they could possibly learn it all, they will walk away and buy elsewhere. I recently listed an ornamental railing manufacturer for sale. It’s not a terribly large business, we have it listed for $599,000, but I am confident we will sell it. The owner took his military training and applied it to his business. There is a system in place for literally EVER procedure, such that anyone could come in an easily find out everything that needs to be done. Buyers LOVE that! Even if you don’t plan on selling your business, this is simply a great idea. Imagine the time saved with any staff turnover. You never have to teach the same thing twice.
Lack of computerized records: This one makes potential buyers run for the door! I had a business listed for 8 months that I could not sell, yep, even the Jersey Girl strikes out sometimes. All record keeping was manual. When I asked the Seller for a list of his customers, he pointed to a row of filing cabinets and said, “its all there if you really want to know!” If you make buyers work too hard to get the information they need to make an intelligent decision, they will pass so fast your head will spin. If you have a business worth selling and don’t have the time or patience to computerize your records, pay someone to come in and do it for you. It will pay for itself in spades.
Lack of flexibility: A seller who says, “its my way or the highway,” will severely limit the potential buyer pool. Flexibility may be required in a number of situations. It might be that the buyer wants a longer training and transition time, or it might be that they want the Seller to hold SOME paper for a period of time. Perhaps if it is perceived that a portion of the customers may not continue with a new owner, the buyer may request a portion of the payment be connected to actual orders placed by these customers. Buyers want to feel that a business owner is working WITH them to transition. If the buyer feels that the seller’s attitude is one of “take the money and run,” it is the buyer who will be doing the running! Before simply saying “no” to a buyer request, remind yourself that it is a negotiation. Ask for something in return. Most successful business sales are a series of small negotiations over minor issues. If you want success – Be Flexible!
Seller Engagement: Sometimes when a shop owner has made up his mind to sell and listed the company, he mentally disengages from the business. Because an end is in sight, the seller may have a tendency to not keep the same hours or work as hard as he once did. This is incredibly dangerous because it can have a negative impact on the financials. Even if you had a kick ass year, the prior year, if your numbers are showing a downward trend for the latest quarters, buyers will take caution. The period of time that you have your business listed is just like having your house on the market – you know….that time when the house has to look immaculate every day. This is the same principle. When your business is on the market, its time to “be on your game,” like never before. Don’t slow down until you successfully reach the finish line!
Although there are many reasons that a manufacturing company might not sell, these are the most common reasons. The good news is that ALL are avoidable. Next month we’ll start to take an in depth look at methods of pricing a business. Are you thinking of selling your manufacturing business, but don’t know how to price it? We do! Call us for a free, no-obligation consultation at 908-387-1000.
Fran Brunelle is an industrial auctioneer with almost 20 years experience, a manufacturing business broker, licensed real estate broker specializing in industrial properties, a real estate auctioneer, certified appraiser and author. Fran has established several corporations that provide services to the manufacturing industry. The “Accelerated Group of Companies” provides tools and services to help manufacturers grow and exit strategies to maximize dollars when they are ready to retire or sell their manufacturing business. The group of companies that Fran Brunelle has established includes:
www.AcceleratedBuySell.com – Provides Online Industrial Auction Services, Used Equipment Auctions, Capital Equipment Auctions, Plant Liquidations, Industrial Plant Cleanout Services, Used Machinery Location Services, Certified Machine Tool and Equipment Appraisals, and more.
www.AcceleratedMfgBrokers.com – Specializes in Manufacturing Business Brokerage and Mergers and Acquisitions. We help manufacturers develop exit strategies to maximize retirement dollars, and successful manufacturers expand through acquisition of other manufacturing companies, product lines and customer lists. Manufacturing Companies for sale throughout the United States are listed on this site.
www.AcceleratedRE.com – Provides Industrial Real Estate Brokerage Services, Online Real Estate Auctions, Sealed Bid Real Estate Auctions and complete industrial facility cleanout services.
www.IgniteMfg.com – Provides funding for products made in the USA, and engineering/manufacturing educational needs through Crowd Funding.
www.MfgWebSolutions.com – Provides web development and social media services for manufacturers at under-market rates.
Fran Brunelle is a contributing author to:
blog.AcceleratedBuySell.com - A site that provides the latest manufacturing news, statistics and opinion. It also provides information on how to grow a manufacturing business, and what to do if you are a manufacturing company that needs to close.
MFGWebSolutions.com/blog - Provides the latest information on social media and web development for manufacturers. It gives manufacturers tips and tricks for boosting their web presence.