Preparing and Selling a Metal Fabrication Business, Part I
Studies show that approximately 12 million baby boomers own small businesses in the United States. Of those 12 million, about 70% will retire over the next two decades. Although my parents sold their business, the one I grew up in, not too long ago, it certainly fits that description. Their experience went well; they handled the transition well and although many family businesses are sold to family members my parents have found a suitable non-family buyer. There aren’t enough words to explain how beneficial this has been for all parties involved.
The reality is that many manufacturing companies don’t have a natural succession plan. If no family member or person employed by your business is interested in buying the business and becoming an entrepreneur, the next option is to look outside the business, but how do you get started? I interviewed Steve Hammes and Jim Schmitt of Integrus Consulting, a brokerage firm specializing in mergers and acquisitions, to get some insight.
How long does it typically take to build and sell a business?
“Start with the end in mind,” as Stephen Covey would say!
You, the owner, should start planning at least three years in advance of your desired release date, and perhaps as early as five years in advance. For a third-party sale that involves engaging multiple potential buyers, you can expect a process of six to nine months from the date the business is ready (the day you start marketing it) until the sale is closed. If you are selling to the first buyer who arrives, it can be even shorter, but the terms may not be optimal for you.
The big step is to prepare the business for a sale. For example, the time and effort required to develop an information package on selling a business can be considerable. It’s amazing how many companies don’t have the most basic information, such as a current organizational chart with job descriptions. A team of owners who do not have this level of documentation is on a long and difficult road before they are ready to sell.
Other concerns are strategic, involving business management and intellectual property (IP). Building a competent and motivated management team with incentive compensation systems and appropriate intellectual property protection typically takes more than two to three years.
What’s the very first step in the process?
The first step is to ask an objective party to estimate the value of the business and, more importantly, how buyers (both financial and strategic) view and determine the value of the business. This process should involve an assessment of the state of the main drivers of business value and to what extent these need (or can be) strengthened. It becomes the roadmap to prepare the business for sale.
For example, business value is determined by profits and risk. In a situation where a customer represents more than 10% of sales, most buyers perceive excess risk, which increases their required rate of return to offset that risk, thereby reducing the value of the business. It is important that you understand this from the perspective of potential buyers. Changing customer focus can take a long time, but if you can do it, you will reduce the perceived risk for those buyers. This is just a value driver, of course.
Some value drivers are more important than others to some buyers. For example, if the buyer already owns a business, he may want your customer base for his other products. Others may want your products and workforce to complement their product offering. Others may appreciate your location more.
Part of assessing the value of a business is estimating the seller’s after-tax revenue. Will this be enough to give you the financial independence or security you are looking for? Otherwise, a business value improvement plan is probably warranted.
Such a plan is a written strategy that demonstrates that the business is able to perform well when the owners leave. The plan should include, but not be limited to, a well-defined organizational chart with a plan to add staff as the business grows; three to five year revenue projections with growth forecasts for customers and their industries; equipment maintenance plans; an investment strategy defined over three to five years; and a diversification strategy to ensure that one customer or industry does not dominate the revenue stream. Of course, the most important driver of business value is a cohesive and dynamic management team who will continue to run the business after the sale.
What are the most common missteps you see?
- Sale to the first buyer who presents himself.
- Sign a non-disclosure agreement (NDA) too quickly.
- Accept financing from the seller on terms that are too favorable to the buyer.
- Unreasonable expectations on business value.
How does a business find buyers?
We distinguish financial buyers from strategic buyers.
If your goal is to maximize after-tax sales proceeds, you should seek out strategic buyers: major competitors, major customers, or suppliers, usually in the same industry. Such a sale is based on the idea that the synergies of business combinations justify better valuations for the seller (sums 1 + 1 = 3). Financial buyers are typically private equity or investment firms or family investors, although some of them may have strategic buyers in their existing portfolios.
You can find buyers through market research using industry and trade association listings and other public information. Ask other industry players who might be looking for acquisitions. You can even fish with potential buyers you know well.
We are a member of Axial, which is a platform on which businesses for sale can post non-sensitive information. Often the buyers looking for Axial and other such platforms are buyers of private and financial capital, but sometimes a strategic buyer appears. Beware of brokers who primarily rely on their past and existing relationships. Their barrel can empty quite quickly.
The key to sourcing is to reach the decision maker in an organization. They are usually a busy and pragmatic person who will tell you very quickly if the company you represent is of interest. If so, they will want to know more. Most understand the merger and acquisition process and adhere to NDAs.
Is the current market good for homeowners considering selling?
Right now, in the middle of 2021, the market is very good for sellers. Incomes are generally good and businesses are looking to invest and grow. Interest rates are low. Much of private equity and investment funds are looking for acquisitions.
This does not mean that the process will or should go quickly. You certainly don’t want to lose sight of your goals and simply sell to the first person. Signing an NDA is one thing; negotiations are quite another thing. Final negotiations can get tough, and having the mental freedom and influence to walk away is the position you want to be. Owners like you learn a lot from false starts and are better prepared for the next round.