Selling a Manufacturing Business? Don’t Ignore This Guide
You’ve built your business with tangible outcomes in mind. Manufacturing is as hands-on as it gets!
Now that you are thinking of selling, it can be difficult to quantify all the intangible assets that make up the heart and soul of your company–after all, your business is so much more than the product you produce.
You need a team of professionals, including lawyers, financial experts, and more, to help ensure you don’t sell yourself or your business short.
This blog takes you through the process of selling a manufacturing business and how Exitwise can help you expedite everything.
TL;DR - How to Sell a Manufacturing Business
Selling your manufacturing business doesn’t have to be overwhelming. Consider the following steps:
Business Valuation
Prepare Financial Records
Enhance Business Appeal
Confidentiality Agreement
Market the Business
Screen Potential Buyers
Negotiate Terms
Due Diligence
Finalize Sale Documents
Transition Plan
Exitwise makes the process of selling your manufacturing business simple! Let’s examine each step in detail in this blog.
How Do You Determine the Value of a Manufacturing Business?
You can use a few different ways to determine the value of your manufacturing business, including:
Earnings-based valuations
Market comparables
Income-based valuations
Cost-based valuations
The most common way to determine your company’s value is to use earnings-based valuations.
With this method, value is determined by looking at earnings over a certain time period and assuming similar future earnings growth.
What is the Average Multiple for a Manufacturing Company?
A valuation multiple is a ratio that compares two factors, such as the business’ earnings compared to the implied value of the company, known as the SDE (Seller’s Discretionary Earnings) multiple. The average SDE multiple is between 2.68x and 3.54x.
Here’s an example of how it works:
Another valuation multiple compared to net income is the EBITDA multiple, which looks at Earnings Before Income, Taxes, Depreciation and Amortization. The average EBITDA multiple for a manufacturing business is between 3.54x and 4.19x.
Here’s an example of how it works:
Remember, these are simply average examples. Your unique business size, sector, and product all factor into your average multiple.
Key Factors That Attract Serious Buyers
As a seller, you need to understand the key considerations that shape a buyer's decision.
Here are the main elements that can enhance the appeal of your manufacturing business and facilitate successful transactions:
Financial Stability and Profitability
Buyers prioritize businesses with strong financial records and consistent revenue growth. So your manufacturing business should have:
A detailed record of past performance and well-documented financial records.
A track record of growth and signals of a stable demand for your products and services.
A clear picture of the profit margins and expenses to highlight where you've reduced costs and maintained profitability.
Customer Base and Market Position
Buyers will look for businesses that stand out. Here are key things you should do:
Define your unique selling proposition (USP) that differentiates your business from the rest.
Analyze your market share to strategize and present your business in the best light compared to the competitors.
Have a diverse customer base across multiple markets.
Protect your intellectual property (IP), including trademarks, patents, and innovative technology, to maximize your business value.
Growth Potential and Scalability in Operations
Buyers are super attracted to manufacturing businesses that have streamlined their processes.
Here's what you can do to show your company is efficient and scalable for growth:
Highlight opportunities for growth, such as expanding into new markets, improving existing products, or collaborating with other businesses.
Have transparent, standardized processes and use technology to handle their repetitive tasks.
Look for areas to optimize resources and reduce unnecessary steps.
Efficient, Experienced, Competent Management Team
Buyers look for a business with a strong management team since it gives them confidence that the business will thrive after acquisition.
Here's how to showcase a capable and experienced team:
Document all your company's procedures.
Have training programs in place to ensure operations continue seamlessly.
Empower your management team to seize opportunities and navigate challenges to demonstrate that the team can guide the business without you as the owner.
At Exitwise, we understand the intricacies of making your business attractive to buyers. We can help you find and hire the right experts to help you through each process.
What Documents Are Needed to Sell a Manufacturing Business?
Many documents are needed in the sale of your manufacturing business. It is best practice to hire a team of professionals to ensure you are preparing everything correctly.
Some common documents you need to sell your business include:
Articles of incorporation (everything you prepared and signed when you first became a business).
Business licenses, real estate documents, employment contracts (everything that keeps you in business day-to-day).
Tax records and returns, bank and financial statements, and credit history documents (everything that demonstrates how you pay to do business).
Accounting of inventory, suppliers, and distributors (everything you sell, who you buy it from, and who you sell it to).
We can help you find and manage the best team of professionals to collect, prepare, and account for these documents.
How to Handle Employee Transitions During the Sale
A thoughtful approach to your employee transition during a sale protects your business value and sets the stage for a smoother transition.
The six steps below can help create a structured and supportive environment:
1. Communicate Early with the Buyer
You should communicate with the buyer early to map out the key staff and department leads that are essential during and after the sale.
Additionally, they can decide on the transition roles of some of the employees to train new hires on the buyer's team. Have clear communication to understand if the buyer will retain all employees and/or bring in their team.
2. Review Legal Obligations
Your business should be compliant with employee rights during sales and acquisitions. So, review the employee contracts to understand any clauses on terminations and bonuses.
Review any union implications to prevent disputes and adhere to the labor laws. Remember to manage nondisclosure agreements to prevent your key employees from disclosing sensitive information to competitors.
3. Communicate at the Right Time
Timing is crucial; if you reveal the sale of your business too early, you risk distraction, but waiting after closing the sale can erode trust.
Many business owners share the plans once the letter of intent is signed, so staff are in the loop without derailing negotiations. You should answer questions explaining the sale, what might change with their roles, and what will stay the same.
4. Offer Retention Incentives
You should offer bonuses to key employees who stay during the transition. You should also provide them with transition contracts guaranteeing their employment for a set period.
The incentives should be aligned with performance milestones, such as training the buyer or completing system migrations.
5. Maintain Morale and Trust
You should maintain employee morale during the uncertainty. Foster open dialogues and transparent communication to allow your employees to voice their concerns and feel acknowledged. Prioritize mental health and train the employees on the change of management to help them adapt smoothly.
Besides, you should provide consistent encouragement for their achievements through rewards, recognition, and awards.
6. Integrate Company Cultures
You should plan how to integrate the company cultures successfully after the acquisition. It can be through coordinated joint workshops, establishing cross-company training for both teams.
You should also create a time where teams from both sides work together to promote collaboration.
10 Parts of Selling a Manufacturing Business
Now that we’ve covered some of the initial basics of selling your manufacturing company, let’s plan a path forward with the following steps:
1. Business Valuation
The most important step, as we’ve gone over already, is correctly valuing your business to fully realize your success and get what you have worked years putting into it.
To get started, explore Exitwise’s free valuation calculator. While this gives you a good indication of the value range of your manufacturing business, you’ll need a team to help you narrow that value down.
We can help you find, hire, and manage the right professionals to move forward with your sale.
2. Prepare Financial Records
As noted, you’ll need to collect, collate, and prepare a bevy of financial records to sell your manufacturing company.
From tax returns to employment contracts, from the forms that made you a business to the licenses that keep you in business, you’ll need help ensuring that all financial records are prepped, ready, and included.
Exitwise can help you get the best prices for your manufacturing company by hiring and managing the right M&A experts for you.
3. Enhance Business Appeal
You wouldn’t try to sell your house for top dollar without making sure it had the most curb appeal possible, right? It’s the same with selling your manufacturing company!
Enhance your manufacturing business’ curb appeal by carrying out the following:
Sell while your sales are up and growing, even if incrementally.
Fix any issues with your manufacturing warehouses and ensure any space you own is clean and running smoothly.
Shine a spotlight on the ways in which you fill a niche in your market and update your marketing materials accordingly.
Continue to build a solid foundation with others in your industry. Sound relationships sell companies.
Due diligence will be discussed in detail in step eight, but one of the best ways to enhance your manufacturing company’s appeal is to complete a thorough and transparent due diligence process.
4. Confidentiality Agreement
Preparing a confidentiality agreement prior to the sale of your manufacturing company is an important step in securing your trade secrets and the sale itself.
It is important for confidentiality agreements to include terms that clearly detail the return of all information to you once the potential buyers have reviewed it.
Additionally, any interested parties must be legally bound to refrain from discussing your business and the forthcoming sale until the sales contract has been finalized.
This integral step in your merger and acquisition process cannot be completed without the aid of legal counsel.
5. Market the Business
Not only do you have to enhance your manufacturing company’s appeal, you also need to market that appeal to potential buyers.
While you may have a solid marketing plan in place for your product, this step is about marketing your entire business (both the tangible and intangible parts).
6. Screen Potential Buyers
Once you’ve marketed your manufacturing business successfully and buyers have come forward with interest, you’ll need to screen them to determine if they are the right fit to acquire your business.
A few questions can help you decide which potential buyer is the right one:
Do they have the knowledge, licenses, background, etc. needed to take over your manufacturing business?
Are they interested in your business specifically?
Can they afford your asking price?
Will they be able to purchase your manufacturing business when you want to sell it?
How motivated are they to move forward with the purchase?
Finding the best buyer for your manufacturing business takes forethought, skill, and time. Don’t rush this step!
7. Negotiate Terms
As you may imagine, the terms of selling your manufacturing business can be quite complex. You’ll want to consider tax implications, earning protections and warranties, indemnification, and more.
Arriving at negotiations fully prepared and with a team of experts to back you up is the best way to find success.
8. Due Diligence
The due diligence process is one in which you, the seller of a manufacturing business, provide potential buyers with all the data, documents, and decision-making material they need to feel comfortable making the purchase.
Once again, preparation is the name of the game for this step of selling your manufacturing company. Ensuring a smooth purchase process starts with preparing the best due diligence package possible.
9. Finalize Sale Documents
The ninth step in selling your manufacturing business is one that you cannot do without the hired help of a specialized legal team.
Finalizing your sale documents includes technical skills that only seasoned mergers and acquisitions law firms possess. Don’t try to go it alone–you need the help of a team of professionals!
10. Transition Plan
Before you take payment for the sale of your manufacturing business (generally referred to as “closing”), but after everything else is complete, you’ll need to prepare and follow a detailed transition plan in collaboration with the buyer.
Your manufacturing company has many moving parts. Remember all those tangible and intangible pieces we’ve been talking about?
While the actual sale can be finalized with signatures on all the right documents, the transition from you as owner of the manufacturing business to the right new owners will take careful planning.
Steps to Negotiate a Higher Sale Price
While the 10 steps we've discussed can help you sell your business, you should also take a strategic approach in your negotiations to maximize the sales price of your manufacturing business.
Check out the crucial actions to take:
Strengthen Your Business Before Negotiations: As mentioned earlier, you should have three to five years of accurate financial records. You should also resolve any legal issues that scare off buyers and make operational improvements to boost your profitability.
Outline Non-negotiable Elements of the Sale: Set clear objectives to anchor you throughout the negotiation process, which include the minimum sale price, the timeline for the sale, and the specific terms regarding the future of your employees.
Create Competitive Tension: Identify different types of buyers to increase your chance of a successful sale. Remember to tailor your negotiation approach to address their specific interest and concerns. Set deadlines to encourage the buyers to act quickly and make their offers.
Research Your Buyer: You should understand your buyer's motivations, needs, and constraints. Position your business as a solution to their specific needs, whether it's to improve their bottom line, enhance their market reach, add to their manufacturing capacity, or offer complementary products and services our asking price is fair by articulating the unique selling points of your business, such as a loyal customer base or a patented, innovative technology.
Tax Implications of Selling a Manufacturing Business
The way your manufacturing business is structured can impact your taxes and the net profits from the sale.
Here are some tax implications to consider:
Asset Sale: In an asset sale, you sell individual business assets like equipment, contracts, inventory, and intellectual property while the business entity remains with you.
In this case, each asset is taxed separately, which might trigger higher taxes. However, buyers can reset the depreciation time on the assets and get tax advantages in the future.
Stock or Shares Sale: In a stock or shares sale, the buyer takes ownership of the entire manufacturing business, including all assets, liabilities, and legal obligations.
Comparing the stock sale vs. asset sale, the stock sales are more straightforward and more tax-efficient, with the gains taxed at the capital gains rate. However, for buyers, their depreciation benefits become limited.
Capital Gains Tax: This tax applies to the profit made from selling your manufacturing business, and it's calculated based on the difference between your company's purchase price and its selling price.
If you have owned your business for more than a year, the benefits include lower long-term tax rates. If it was less than a year, you'll be taxed as ordinary income.
Depreciation Recapture: Your manufacturing equipment might have depreciated over the years, and it can trigger a depreciation recapture, which will be taxed as your ordinary income.
Given the complexities surrounding these types of taxes, you should consult professionals.
Engage with a lawyer to advise you on all legal aspects of the transactions. Also, you should work with a tax advisor who has experience in M&A and exit planning to help you understand the tax implications of your sale and develop strategies to minimize the tax liabilities.
Start a conversation with us, and let's help you find the right advisors for your manufacturing business sale.
How Long Does This Process Take?
On average, selling your manufacturing business should take between six and twelve months. Considering all the steps above and the time and effort needed for each one, that’s not a long time at all.
Remember, Exitwise stays with you throughout the process.
We’ve helped so many companies through this entire process, including the successful sale of the manufacturing company Great Lakes Tile Products!
What Are The Common Challenges of This Process?
Ten of the most common challenges to selling your manufacturing business include:
Determining the correct value of your manufacturing company.
Deciding on the right time to sell.
Finding the right buyer at the right time.
Jumping through the myriad legal and technical hoops.
Dealing with stress associated with the selling process.
Drafting and maintaining the right documents, especially confidentiality agreements.
Understanding the technical tax structures that have major implications on the sale of your manufacturing business.
Coming to terms with walking away from the business you’ve built.
Managing current employees, their stress and insecurity.
Finding the right team of professional experts to help you navigate every challenge.
Exitwise can take care of number ten–which helps you tackle all the other challenges listed and any others you might face in the process of selling your manufacturing business.
Frequently Asked Questions (FAQs)
Let's answer some commonly asked questions about selling your manufacturing business below:
How Can I Sell My Manufacturing Business without a Broker?
You can sell your manufacturing business without a broker by following these steps:
Prepare financial records and operational details, and document your operational systems.
Use a professional valuator to determine the value of your business.
Find buyers through your industry contacts and online marketplaces.
Screen the buyers carefully.
Negotiate the deal price and payment terms.
Hire a business attorney to draft the sale agreement and non-compete clauses.
What Is the Best Time of Year to Sell a Manufacturing Business?
There isn’t a particular time in the year that’s more suitable for selling your business. However, the best time to sell your manufacturing business is when:
It's performing well in terms of revenue and profits.
There's demand for the type of products or services you offer.
Your machinery and automation systems are up to date.
Can I Sell My Manufacturing Business If It Has Debt?
Absolutely!
The common ways to sell your business with debt are:
Pay it off before transferring your business to the buyer.
The buyer agrees to take over your debt repayments.
You can sell the equipment, contracts, and inventory, and use the proceeds to pay the debt.
What Happens to Existing Contracts After the Sale?
Here's what happens when a business is sold:
Some contracts tied to the sale of stock or assets transfer automatically.
The other party can approve or terminate an agreement if the contract has a change of control clause.
Other contracts can be terminated, which would require the new owner to renegotiate or replace the agreements.
Conclusion
Of all the things your hands have held and worked to build, the things you can’t hold sometimes add up to more than you ever thought possible.
Your manufacturing company is worth more than what you can see and touch. It would be an impossible task for you alone to determine the value of this business you’ve built from the ground up.
Selling your manufacturing business is not a process you should take on by yourself.
Exitwise is ready to prepare the way for you to get the most out of everything that makes up the real value of your manufacturing business.
