Owning and operating a manufacturing business is a great way to build wealth and add a sense of fulfillment to your life, but like all things, you eventually have to get out of the business.
Doing that can be a complex process that most business owners don’t fully understand, and unfortunately, that can cause you to lose a lot of money in the final transaction.
Today, we want to go over key bits of information on how to sell a manufacturing company, the prep process for doing so, some of the best ways to model the sale, and more.
Why Sell Your Manufacturing Business? Common Reasons Why
There are a variety of reasons you might want to sell your business, or it might even be a necessity.
In the most positive, and one of our most common client situations, it’s simply time to cash out on your life’s work and enjoy some downtime. You can’t work forever, and selling your business will likely be the largest earning event of your life. Eventually, it’s simply time to sell, enjoy a massive payday, and move on to the finer things in life.
Another scenario is that you’re either not impressed with your company’s performance and want to enter another industry, have outgrown the scope of your business and want to start a bigger project, or otherwise want to continue growing and building wealth. Getting rid of the first company to start bigger and better things is always a positive move, and if you do it right, the sale of your business can fund some very large projects and expansions.
However, it’s not always the most positive experience. Manufacturing is one industry that we see clients from that often has some negative reasons triggering a sale. As a member of the industry, you’re likely very familiar with how competitive it can be and how you have to fight for even the tiniest profits to appease customers, new technology is always coming out and leaving your production model obsolete, and turnaround rates are exceptionally high in the manufacturing industry. In this case, it is sometimes better to sell your business before those problems start to drag it down so you can enjoy a sizable profit and move on.
The reason we have gone over the various reasons you might want to sell is that your reason for selling will impact the decisions you make throughout the selling process. There are multiple ways to sell a manufacturing business. Some focus on speed if you just want to cut your losses and get out, some focus on preserving your legacy, and others just try to maximize your profit in exchange for a slower and more complicated selling process.
We’ll go over the most common methods in the sections to come.
Preparing to Sell Your Manufacturing Business
This is where a lot of business owners, even outside of manufacturing, tend to make the most mistakes. Selling a business is a massive transaction, and it is far more complicated than you’re probably ready for. As such, this is a process that should be thought about and planned for up to 7 years before you actually start finding buyers.
In the most optimal situation, you’ll have the eventual sale of your business in mind from day one, because that lets you keep everything neat and organized from the start, and you’ll likely make better decisions throughout your business’s lifespan. However, it’s already too late for that for many owners.
So, we’ll assume you at least have a few years before you’re planning to sell it, and if you are trying to move faster, you should understand that it will require a considerably higher amount of hands-on organization and footwork. Hopefully, you kept your important documents.
For the most part, the prep process is fairly simple in concept. The potential buyers you negotiate with will want to see at least 4 years of records regarding your business’s finances, profits, and general performance, and at most, 7 years is still an acceptable request.
As we said, the best way to prepare for this is to keep everything your business does well-documented and organized from the start. However, that’s a lot of data if you’re open for decades. So, at least make sure you can track down 7 years of complete records to present to appraisers and potential buyers.
If you don’t have certain records on hand, you can typically retrieve copies from their source or otherwise piece together a complete database before the sale. What you don’t want to do is bring incomplete records to the table. This can scare a lot of buyers away, or it might be an easy way for ruthless negotiators to cut a lot of your asking price out of the equation to make up for the risk they’re taking.
A: Keeping Your Plans to Yourself
Another key aspect of selling a manufacturing company that many business owners mess up with is keeping their plans to themselves. From the second you decide it’s time to sell (and you make sure that the time is right!), to the day the transaction takes place, it is imperative that you don’t go around telling people. You, your family, and obviously the brokers and potential buyers you deal with are the only ones who should know.
You need to keep the looming sale from your employees and supply chain partners because if they sense a sale approaching, they can abandon your business and plummet its value. To them, they’re just getting another job. To you, you’re losing tens of thousands, if not millions of dollars.
Of course, any good boss is going to want to give their employees a chance to prepare for their own lives. Don’t worry. There is an ethical time to do that without destroying your potential business value.
B: Get The Business Valued
Finally, one of the last steps you’ll take in the preparation process is valuing your business. You’ll do these two ways.
First, you should try to value it yourself. Look at similar businesses that have sold recently under similar circumstances, and you can get a ballpark figure of what to expect when you sell your business. Of course, your personal bias will come into play here, and this is not enough.
Once you understand what you should be looking at, speak to a professional broker or appraiser. They have a deep understanding of business sales, and they can often get a far more accurate evaluation of your business with a lot fewer problems.
This will give you the appropriate asking price that you’ll present to potential buyers. The overall number might change depending on negotiations, though.
If you are unsure about how to value your business, read our supreme guide: How to Value a Business for Sale.
Choosing a Method of Sale
Now, you’re at the part where you can start finding a buyer and moving toward a sale. There are many ways that you can facilitate the sale of your manufacturing business. Each method has its own pros and cons, and each one is useful for various situations.
We’ll go over some of the most common options.
1: Selling to Family, Friends, or Star Employees
This is an option if you don’t mind slower payouts but would love to have someone you trust carrying on your legacy.
If you are proud of your business and want a trusted individual to keep your work alive, or if you’d just like to help a trusted individual elevate themselves to a new tax bracket and find success, you can sell the business to them.
Obviously, such buyers rarely have the funds to buy manufacturing businesses outright. That’s why you create a seller’s note. A seller’s note is a type of casual financing. It’s still legally binding, but it’s an agreement that the buyer will pay you regular payments from the profits of the business.
This means that you won’t enjoy a lump sum payment, there is a bit of risk if the business goes under, and you have to have a suitable person in mind, but this is the primary way to preserve your legacy or “pay it forward”.
This can also be a great option if you have employees that would like to stay with the company but are afraid of new ownership. If someone they know takes over, they are more likely to stay on board.
2: Liquidating Assets
Sometimes, especially when you’re trying to maximize your profits and don’t mind waiting, you can sell the manufacturing business in pieces. Liquidate your machinery, contracts, trademarks, and other things of value separately, and you might be able to enjoy some tax breaks on certain assets.
This can minimize your tax liability, and as long as the assets are in demand, it shouldn’t prolong the selling process too much.
The problem with this method is that it is far more complicated than simply signing the business over as-is for one price. You might need to find multiple buyers for various assets, you might need to negotiate the price of each asset, and the paperwork is more complicated and robust. Considering there is already a ton of paperwork involved in all the other methods, that is a substantial consideration.
3: Selling to a Competitor or Investor
This is the most common route business owners take if they’re not intending to pass down their legacy to someone close to them. It’s easily the fastest way to sell the manufacturing business, you can get more for it due to the buyer’s capital, and you’re handling the transaction with a professional. So, you don’t need to worry about drama or drawn-out problems.
However, there are some downsides to that. First, you will not have anything to do with your business once you complete the sale. They can fire all your employees, change the name, or do whatever they want. With more personal transactions, there’s a sense of respect that you can rely on to at least ensure that they won’t do anything that destroys your good name.
Then, there’s the fact that, while they have more capital to spend, they’re also business professionals. They’re a lot better at negotiating, and they will try to leverage every prep mistake you made to get a lower price.
Once you close the sale, you’re not quite finished. You’re close, but there are still some things you need to do.
1: Notify Employees and Supply Chain
If you have kept your plans under wraps, now is the time to safely give your employees and other people relying on you the news. The sale usually doesn’t take effect for a short period. So, you have time to convince them that they’re in good hands, or they can start making decisions for themselves.
This is the worst part of selling your business. The government wants a large chunk of your profits. Fortunately, you would have been informed about this while modeling your sale process, and now you just have to handle the paperwork and pay your dues. To ensure that you are properly prepared it is important to keep in mind the key tax considerations when selling a business.
3: Financial Planning
As a middle-market company owner, you are likely to retire after the sale of your business. Most of our clients are older, have been in business for years, and have no plans to open a new business or move on to other massive projects.
If that sounds like you, you need a financial advisor to help you plan the usage of your wealth and what happens to it if something happens to you.
You want your wealth to support your lifestyle for the rest of your life, and you probably want certain people to inherit your wealth when you pass on. Those are both things you need to start working on now with a trusted professional, because the longer you put it off after the sale, the higher your chances are of squandering your wealth.
Contact Final Ascent
As you can see, selling a manufacturing company is a complex process, and there is a lot of room for mistakes to be made. That is why the process requires the involvement of professional M&A advisors who possess specialized skills, comprehensive knowledge, and exceptional resources in the field.
If you would like to make the selling process as easy as possible, contact the team at Final Ascent.
We can help guide you through the entire selling process. From your pre-sale prep work to your post-sale financial planning, Final Ascent is here to help.