Manufacturing has been at the heart of American innovation and ingenuity for centuries. Yes, the time has changed; and as technology and global competition write the next chapter of industrialization, the demand for American-made products has never been stronger.
If you are looking to sell a manufacturing business and want to maximize its value, Raincatcher is here to help. We are seen as an industry leader in M&A and were even named the #1 business broker by Inc. magazine. Like every worthwhile endeavor, selling a manufacturing business requires time and meaningful effort to attract the right kind of buyers. While there’s no one-size-fits-all approach to the selling process for a manufacturing business, we tailor our sell-side process to deliver the most optimal outcome for our clients business. The aim of this article is to highlight the process of selling from document gathering through the close.
Process of Selling a Manufacturing Company (at a glance)
If you have decided to sell all (or part) of your manufacturing company, here is a glimpse at what the process will entail over the coming year:
- Build a strong deal team. Align yourself with a business brokerage firm (for deals under $10m) or M&A firm (for deals over $10m) that has proven success representing manufacturing companies. Find a proven M&A attorney (we can introduce you to a number of groups that we’ve had success with), and a tax attorney.
- Compile your materials. Your M&A advisor (Raincatcher) will request a litany of documents from you. This includes financials statements, organization charts, supplier and customer contracts, employment agreements, etc.
- Market the deal. We create an expansive document and financial forecast for your company and then bring it to market. Most of this work falls on our shoulders as we have an expansive database of investors for companies of all industries.
- Receive IOIs. Depending on the size of your deal, your advisor may suggest that you market the deal and push for LOIs. Or, if your business is large enough, we look to secure IOIs ahead of time so that we can shortlist the most capable buyers and present them with more information and meetings ahead of receiving an LOI.
- Management Meetings. Should it be a fit for your business, you broker will join you in hosting investors for a week to share additional information about your manufacturing company.
- Receive LOIs. ‘best and final’ bids will be received after hosting the most capable buyers for meetings.
- Sign an Exclusive LOI. After some negotiation, we help you select the most capable buyer based on their price, terms, likelihood of closing and plans for the company.
- Due Diligence. Another 60-90 day due diligence window commences with the buyer and their advisors diligencing every inch of your company.
- Close. Closing time. The deal is done and you’ll typically get 80% – 90% of the payment for your business at this time.
- Transition. After closing, the buyer will typically require the sellers to stay behind and assist in transitioning the business to them for an agreed-upon period of time.
Hear From Previous Clients Who Sold Manufacturing Businesses
What Determines the Valuation of a Manufacturing Business?
Lower middle market manufacturing businesses (sub $15m EBITDA) trade across a fairly large range depending on how desirable they are. A manufacturing company that trades for a high multiple (~10x) is one that has many of these traits:
- highly engineered product
- critical product(s) (think medical devices or A&D products)
- High growth
- Scale, potentially $10m EBITDA plus (the larger the business, the higher multiple)
- A large total addressable market or the ability to expand into adjacent ones
- High margin (indicative of a high-level of automation (lights off facility) and differentiation from competitors
- Recurring customer base without concentration
- Strong leadership team
- Clean financials
- Well represented by a professional M&A firm such as Raincatcher
As discussed above and illustrated in this chart, the business valuation of a manufacturing company can range greatly. We’ll dig into some of the more critical factors determining manufacturing company valuations below.
More Manufacturing Resources
The historical and projected financial performance of your manufacturing business is a significant factor in its valuation. Interested buyers will need to be able to look through updated accounting records, tax returns and financial statements and records for factors such as revenue, profitability, cash flow, and growth trends to evaluate the business’s financial health and potential returns on investment.
Generally speaking, the larger a business is, the higher valuation it will go for. A business that generates $500k in annual profit may trade at half the valuation multiple that a like business generating $3m in cash flow trades at.
Additionally, investment groups like to see a margin in excess of 20%. High-margin manufacturing companies are indicative of the business having a moat and being differentiated from their competitors.
Industry Segment and Market Conditions
The industry and market conditions in which the manufacturing business operates play a crucial role in its valuation. Factors such as market demand, competitive landscape, barriers to entry, and industry growth potential impact the perceived value of the business.
Generally speaking, the more niche an industry is the smaller its total addressable market is. However, it is likely that they have few competitors in that niche and can therefore have more repeat business and more durable earnings. Investors will have different views on niche markets with most buyers liking them and others disliking them for their limited growth prospects.
Buyers assess the growth potential of the manufacturing business to determine its value. Factors such as product diversification, expansion opportunities, market penetration, innovation capabilities, and customer base contribute to the assessment of future growth prospects and impact on business valuation.
Even the niche manufacturing business we discussed in the above paragraph may have strong growth prospects if there is an adjacent market they can move into and product that they can produce.
Assets and Intellectual Property
The tangible and intangible assets of the manufacturing business can also impact the company’s valuation. This includes manufacturing equipment, real estate, inventory, intellectual property (such as patents, trademarks, or proprietary technology), and customer contracts. Well-maintained assets and valuable intellectual property can enhance the business’s value.
Generally speaking, companies with state-of-the-art production facilities and businesses that manufacture highly engineered products will trade at higher multiples than those with more commoditized products.
Additionally, companies with strong teams in place where employees have worked for many years are seen as more desirable and more able to transfer leadership over to a new owner. While this asset doesn’t go on the balance sheet, employees are a critical part of the business.
The strength and stability of customer relationships and the diversity of the customer base are considered in the valuation process. A broad and loyal customer base, long-term contracts, and recurring revenue streams can positively impact the perceived value of the business.
What is the Process of Selling a Manufacturing Business?
While it may not be a fit for all clients, most of the entrepreneurs we work with who run manufacturing companies will see the most competitive price and terms for their business coming from a well-run auction process.
Auction processes typically take 7-9 months to complete. On certain occasions, we may recommend that our client hire an accounting firm to complete a quality of earnings analysis before we start the auction process. In our experience, this cost and time is justified and can manifest itself in 5% – 15% hire exit values.
We’ll go into each of the steps of an auction process at a high level below:
How we Maximize Exit Proceeds for our Manufacturing Clients with our Auction Process
Sell-side due diligence
Due diligence is traditionally done by business buyers and not business brokers. However, our comprehensive sell-side process includes a diligence process before we bring a business to market.
Our comprehensive diligence and sale process is designed to drive the highest value for the business owner as buyers know that there won’t be any skeletons in the closet once they submit an offer and start spending money on legal and financial diligence.
Specially designed brokerage or M&A auction process
Depending on the size of your business and industry your company operates in, we may recommend a traditional brokerage process with a listing price. Or, a competitive auction process with buyers submitting the price and terms for negotiation.
Our buyer list is comprehensive and will be tailored to include (or exclude) and participants in your industry who may make great strategic buyers or who you want to avoid knowing the business is on the market for sale.
It isn’t uncommon for strong, sizable companies to get 5+ indications of interest (soft offers). We’ll then validate those buyer groups, attend dinners where they meet out clients, prepare further data on the business and negotiate the deal terms that the prospective buyers will propose in their final offer.
Negotiate LOI terms and facilitate diligence
Once LOI’s have been received from potential buyers we work with our clients to select the potential buyer with the most attractive offer before executing the exclusive LOI.
It’s common for diligence to take 60-90 days before closing. This requires a significant time commitment from all parties. Additionally, final deal points are negotiated and contested during this period.
Talk to the experts
Care to learn more about Raincatcher’s brokerage and M&A processes and what we can do for your business? Get in touch with us for a complimentary consultation.
What Affects the Market's Appetite for the Manufacturing Industry?
Industrial companies with an evergreen demand for their product/service and recurring customers or re-occuring clientele are nearly always in high demand for acquisition from investors such as private equity firm, strategic buyers and search funds.
Generally speaking, industrial companies and other manufacturing businesses and companies are purchased in leveraged buyouts from investment groups. A leveraged buyout typically utilizes debt to finance 40% or more of the purchase price. Because of this debt utilization, private equity groups like the manufacturing space most when interest rates are low.
Thinking About Selling?
If you are entertaining selling your company, feel free to request a consultation with one of our manufacturing business brokers or M&A specialists to learn about our unique process and why we believe it is the best in the industry.
What Role Does Technology Play in Investors Analysis of the Manufacturing Industry
Strategic buyers and private equity groups alike are interested in buying companies at a discount to the cash flow they can take out of them over the coming decade. There are a few ways they go about this:
Invest in companies that they can grow significantly
Acquire companies that are highly differentiated and therefore have a very stable, predictable client base and cash flow.
In both of these cases, having a manufacturing facility that has leading-edge technology makes your business far more desirable to investors. Either this technology will be leveraged to grow the business. Or, it is seen as a differentiating factor to separate from the competition and create a higher margin and more durable revenue stream.
Companies that have specialized 5 axis machines and highly engineered products will often time trade at 30%-40% premiums to their peers who are more commoditized such as tool and die manufacturing facilities.
Request a Consultation
At Raincatcher we represent sellers of exceptional lower middle-market companies. Generally speaking, these companies generate anywhere from $2m – $100m in annual revenue. We were even named the #1 business broker by Inc. magazine.
Our team is comprised of former business owners, public accountants and investment bankers. Included in this group is two of our partners who each spent over a decade working at middle-market investment banks where they represented manufacturing companies. This is one of the reasons we are seen as an expert in the manufacturing space.
request a consultation today to review your market value, discuss what type of exit process would make the most sense and meet our team of advisors who have real-world experience selling manufacturing companies.