Today we are continuing our series on “Selling a Manufacturing Business – The Top Five Things Every Buyer Wants to Know.” Today we’re looking at the importance of the numbers in more detail. To review, here are the Top Five:
- What Are the Numbers
- How Big Is Your Customer Base
- Will You Assist With Transition
- Does the Business Have a Unique Product Or Service
- Will The Primary Business Survive
Before we get into a discussion about the numbers, allow me to share some background. My core business provides services to the manufacturing industry. Each year we sell millions in ongoing businesses, product lines, customer lists, manufacturing equipment and industrial real estate. Our two key divisions serve in the areas of Manufacturing Business Brokerage and Industrial Machine Tool Auctions. That means we see both ends of the spectrum. We sell manufacturing companies that are wildly successful and liquidate some that are not. This broad spectrum of experience gives us a unique perspective on what works and what doesn’t.
In the original article (available here), I suggested that an exit strategy should be planned a decade in advance. Extreme? I don’t think so, and if more manufacturers did this, less of them would be on the auction block. What should you be doing in the years approaching the sale of your business? For starters, check out our article and continuing series on The Seven Irrefutable Laws of Manufacturing Business Growth. If you do these things consistently, you will be prepared when it’s time to sell your company and in a position to command the best possible sale price.
When you are ready to sell, what is the FIRST question every buyer wants to know? “What Are The Numbers?” This is the first and most fundamental of questions. Most buyers will want to see 3-5 years of tax returns and financials. Does size matter? Not as much as transparency. Many manufacturers think they are not saleable because they are small; not so. There are plenty of buyers for smaller companies. What if your company is not profitable? My first question is WHY is it not profitable? Is that by design for tax purposes? I’ve sold plenty of companies that did not show a profit. What they did have was steady and predictable sales and cash flow. If your company is providing a lifestyle, (decent salary, bonus, insurance, vehicle, etc.), you have a saleable entity. Whatever the level of profitability, the numbers must be provable!
During a due diligence phase of a business sale, the buyer and his team of accountants will go through your books with a fine toothcomb. If you’ve fudged the numbers to attract buyers, here’s where you’ll lose them, together with your credibility. If you are working with a business broker to sell your business, be upfront with them as to what the true picture is. A good business broker is skilled at painting your company in the best possible light, while maintaining integrity. Whatever the numbers are, you MUST be able to prove their accuracy.
As a business owner, your next logical questions are “What do the numbers mean, and what is my company worth?” My answer is usually, “That depends!”
When selling a manufacturing business, there are no hard and fast rules for valuation that everyone follows.
Most buyers will look at a multiple of sales to determine value. They will then add to or subtract from that based on your unique business. If most of your income comes from one customer, a buyer will deduct based on perceived risk. If you have a unique product and or a highly diversified customer base, you may command more than the typical multiple of earnings. The bottom line is that NO formula can be applied to all businesses. As a general starting point for determining the value of a manufacturing company, I suggest using 2-6 times EBITDA, (earnings before interest, taxes, depreciation and amortization). Another method of calculating value that some buyers use is to discount future cash flow. With this method your future cash flow is projected based on past results and then a calculation is made to determine what the projected cash flow is worth in today’s dollars.
All of the above assumes that a sale is not taking place under duress. It assumes that there is ample time for marketing the business and due-diligence. In the event of the sudden death of an owner, normal valuation methods are not typically used, rather a value based on tangible assets like machinery and real estate.
So the bottom line is that size doesn’t matter as much as transparency and accurateness. Any buyer wants to know what the numbers are and be able to prove their accuracy. Also, rather than putting effort into fudging the numbers, use that same effort to build your business and make it more attractive to potential buyers. Follow our series on The Seven Irrefutable Laws of Manufacturing Business Growth. By doing these things on a regular basis you will be in great shape when it’s time to sell your manufacturing company, no matter what the size.
Before closing this installment of Selling a Manufacturing Business – The Top Five Things Every Buyer Wants to Know, allow me to address those that really don’t have a “business” for sale. I’ve watched hundreds of small manufacturers sit on a dying business. With little or no sales, they pump money from their retirement into the business in hopes of saving it. Don’t throw good money after bad! Shop owners tell me all the time that their antiquated equipment can make a great business for someone younger and with more energy. If some young person has the capital to purchase an existing business, they will want one that is both profitable and modern. If you have no sales and no product lines, you don’t have a business for sale; you have equipment and perhaps real estate. If your manufacturing business is in decline, please read the following articles BEFORE you put another dollar into it:
Next month we will continue this series by taking a look at the importance of a diversified customer base.
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.