Once you’ve determined you’re going all-in to sell your manufacturing business, it behooves you to understand the gravity of that decision. The selling process for a manufacturing business encompasses far more complexities than it would for businesses in most other industries. Rarely are you dealing with the same scale of machinery investments, inventory management, supply chain management and marketing than you are in even a smaller manufacturing shop. Prepping to sell your business on the market is multi-year process with little rest for the weary. Your job is to understand the steps you must take to ensure your transaction is as smooth and successful as possible.
Perform an Audit and Hire a CPA
If you don’t have your books in order, you can say goodbye to any deal worth its salt. Buyers will want to see that the information you provide them is accurate and that they will inherit a business with solid financial standing. Many buyers will expect that your financial statements have been reviewed if not properly audited, so you will want to begin this process well in advance. Ideally, you will have at least three years of audited financials prepared for a buyer’s review. This puts the buyer at ease and makes your chances of receiving a good deal that much higher.
In order to successfully execute an audit, it’s advised that you hire an outside CPA firm. Preferably, the CPA firm is experienced in auditing manufacturing businesses, but you should do well regardless if the firm is reputable. If an audit is unrealistic or too costly, there are options for financial “reviews” which can still grant both you and the buyer additional confidence in the transaction. You will want to show you’ve done your financial due diligence before going to market.
Decide to Contact Strategic Buyers or Private Equity
When you go to market, you will have to decide if you will target strategic buyers or if you think you’re better off selling to a private equity firm. We’ve written at length on the primary differences between the two, but how you go about the sale will significantly vary depending on the route you choose.
If you decide to go the private equity route, you will need to hire an investment banker as a liaison for the sale. In most cases, the banker will take home a sizable fee in exchange for his or her services. The investment bank will require bank statements, inventory records and backlog reports in order to prepare a “prospectus” for potential buyers.
On the other hand, you can contact strategic buyers directly, thus cutting out the middleman and saving you money. The buyer will do their fair share of due diligence and request documentation with similar standards required by private equity firms. The same documentation required by the financial banker will be asked of you from a strategic buyer. However, you will need to constantly replicate this information for each individual buyer (as opposed to relying on a financial banker to do so on your behalf).
Prepare the Required Documentation
As mentioned, you will be obligated to prepare documentation. This will include bank statements and inventory records, but also deeds, employment agreements, suppliers, payables and receivables and CE listings.
You will also want to document your processes as accurately as possible. You’re handing off a business to an owner that has likely not been immersed in the machinations of your processes. In order to make the transition process as seamless as possible, your detailed instructions will help buyers understand how to run operations in your absence. Buyers will see documented processes as more stable, less risky and, in effect, more valuable.
Continue to Build Value in Your Business
When selling, you will need to show not only how your business has performed in the past, but also the growth potential in the years to come. Acquiring a promising customer or planning projects well in advance can give the buyer added confidence in the future prospects of your business. Selling your business is not the time to become complacent with management or investment. In fact, the opposite is true. You will want to do everything in your power to ensure a potential buyer that what they purchase will give them more value than it gives you at the present.
You can add value in multiple ways, but among the most important is the installation of management and the diversification of products/customers. The more diversified your business, the less risk buyers will perceive. Further, if your business is overly reliant on your personal management to run effectively, you aren’t ready to sell. If you can hire managers that can pick up where you left off (and then some), there are few factors that demonstrate as much value as excellent management.