5 Tips to Sell a Manufacturing Business

5 Tips to Sell a Manufacturing Business

5 Tips to Sell a Manufacturing Business

Congratulations!  You’ve decided to sell a manufacturing business but before you jump in with both feet, we suggest you settle in to take stock of your business, systems and current processes. While it may seem like a simple route to just list your manufacturing business for sale in Texas, there are far more complexities at stake. All industries, including manufacturing, have unique characteristics that need to be considered as you prepare for the eventual sale.

Some of these items take a significant amount of time to implement so a business owner would be wise to begin working on these elements well in advance of attempting to sell their company. Your due diligence and careful review of your business NOW will help to secure the opportunity for higher valuation.

  1. Work-in-Process Accounting: Work-in-Process can involve substantial assets and liabilities. In addition, these numbers are moving nearly every day. Labor goes into the project, more materials, customer progress payments, etc. Buyers won’t go for the “eyeball” estimate for the money. Implement industry standard work-in-process systems and have the discipline to accurate accounting.
  2. Proper Management of Customer Payments: This is associated with #1. Far too often we see customer deposits or progress payments just booked straight into accounts receivables. We’ve even seen progress payments booked as revenue. Part of a business sale often involves working capital adjustments, if you are mixing a/r and sales that should be in the work-in-process calculation the problems multiply.
  3. Safety: Make sure your safety processes and procedures are up-to-date. Many buyer will conduct a due diligence “OSHA Style” audit to make certain there are no hidden liabilities. Also, for obvious reasons, take meticulous care to document and track any and all job injuries and accidents.
  4. Contracts with Customers:  Whenever possible have your contracts with customers written so that they are assignable. Also, look to limit “change of control” clauses that create risks when buyers take over the contracts in progress. Get a review by a good contracts attorney.
  5. Environmental:  If you haven’t had a Phase 1 Environmental Survey done on your property in the last 10 years it might be a good idea to make sure no issues have inadvertently crept into your operations.

Preparing for these 5 items will not only significantly reduce the time and friction involved in due diligence but will increase the odds that your deal of your life will make it to the closing table.

Sunbelt Texas has 20 years experience, the decision to sell a manufacturing business will create value for the business owner if done properly.

For more information about Preparing Your Business For Sale feel free to contact us. Email Info@SunbeltTexas.com

Investigate these 7 Points When Buying a Business

Investigate these 7 Points When Buying a Business

Buying a business can be a great move but it takes a lot of due diligence investigation. Due diligence is often thought of as “finding the bad stuff” but it is also important so that you understand what it will take to operate the business after you own it. OJT (on the job training) is helpful but preparation is even better.

Buying a Business

Know what to research

Keep in mind that these magnificent 7 aren’t the only things you need to investigate but they are 7 that are often overlooked or short-changed when buying a business.

  1. Cash Cycle – understand the cash cycle from when you incur cost to when you collect cash. 10 days? 30 days? 60 days?  Think through the stages, when do you spend money? When do you collect money? Every business has a cash cycle, dissect the steps to make sure you understand when cash is expensed and when you receive cash. If you have 10% profit you have 90% you owe other people. You’ll need to fill the “cash gap” with financing or cash injections from other sources.
  2. Hidden Costs – know the “hidden” costs in the system, warranty, call backs, inventory losses, un-billable hours, and uncollected AR. Most business owners only think about these things at year end when the CPA does the business taxes but this effects your cash every day.
  3. Specialized Knowledge – know the specialized knowledge of the current owner. Technical knowledge? Craft knowledge? Relationship knowledge? Supply source knowledge? The employees will judge you beginning day 1. Make sure you know what they expect you to know.
  4. Cash Needs -know your cash per sales growth requirements; don’t grow yourself into poverty. For every dollar in sales you’ll need to have some dollars available to fund expenses and products until you collect the cash from the customer.
  5. Pricing – understand how the current owner prices products and services.  Markup? GM? Guesses? Competitive comparison?  Is there room for improvement? Does current pricing have anything to do with the market? Who has special deals?
  6. Insurance – understand the current insurance coverages and make sure your coverages reflect your risk tolerance levels. Get an insurance audit. Make sure you review every aspect of insurance you need. Often we find sellers are under insured. Getting proper insurance could effect the biz earnings and the amount you might be willing to pay to buy the business.
  7. Licenses – make sure you research the licenses, permits and compliance requirements needed to operate the business. Don’t assume the seller knows everything. Buying a business not in compliance with current requirements is risky business.

While you may be itching to simply sign on the dotted line..

Thinking about what businesses might be for sale?

STOP:  your preparation and due diligence will save you a great deal of  hassle and surprise. Buying a business takes time, thought and research. As an entrepreneur, this is just your first step in creating a successful business.

So You have a Deal to Buy a Business, now what?

So You have a Deal to Buy a Business, now what?

Congratulations but don’t pop the champagne yet. Now is when the real work begins in your quest to buy a business.

Essentially, there are 3 fundamental phases to orchestrate before your final takeover of the company. Keep in mind that each business or industry may have several variations of the progression. Here are some general guidelines but you and your advisors may have other steps or systems to add to this buying chain.

Please keep in mind your agreement to purchase likely has important dates identified. Keep track of those dates and take the action necessary to comply with those.

Phase 1 – Initial Due Diligence and Lender Commitment

This phase is mostly about the financials of the business and your personal financial situation.

Basically your lender will want to make sure that the likely cash-flow of the business fits your overall financial situation. Get with your lender immediately and begin the financial due diligence. Your lender will provide you with a list of items they need. The goal here is to do enough due diligence to get your loan commitment as quickly as possible. Get your advisors (typically at least an attorney and CPA) lined up quickly so they can help on the tricky items

Phase 2 – Full Due Diligence

This is where you and your advisers come up with a list of everything you want to know about the business. It’s important to have the loan commitment in hand when you get to this stage because sellers want to make sure they have a qualified buyer with the funding lined up before they release very highly confidential business information.

This due diligence takes a lot of time.

You need to commit to move thru it quickly, in a very organized manner. Remember, this stage is where you personally and along with your advisors, review, confirm, and challenge all aspects of the information. When conducting due diligence, forget about what the broker or seller or your buddy has said, it’s your job to review and confirm things yourself.

Remember, due diligence is about you, the buyer, managing your risk by knowing the facts.

Put in the work, it’s important.

Phase 3 – Closing Process

This begins after you have completed Phase 1 & 2. At this stage you’ll likely be asked to release or waive the contingencies in your offer and authorize the closing company to begin preparing closing documents.

At the same time you’re working thru the closing documents, you’ll also need to be focused on what’s involved in taking over the business and all of the details.

  • Is your insurance in place?
  • Do you have required licenses and inspections?
  • Is your merchant services account ready to go?
  • How will you introduce yourself to the staff? Is your payroll service set up and ready to go?
  • Have you formed your new entity or LLC?
  • Do you have your sales tax #?
  • Do you have your Fed ID #?

Make sure you’ve created a complete inventory beginning with the above suggestions. While it seems like an endless list, knock them off 1 at a time to create an even stronger foundation for the success of your new business venture.

After Phase 1, 2 & 3 you’ll be a new business owner.

Working thru these 3 phases can be exhausting and frustrating for both the buyer and seller but we’ve had 100s of people make it thru.

Keep a good attitude, try to avoid ultimatums, stay on good terms with the seller and realize there are lots of 3rd parties (banks, landlords, inspectors, etc) who often move at their own pace.

IT Due Diligence when you Buy a Business

IT Due Diligence when you Buy a Business

Intellectual Property Due Diligence (this includes information technology I.T.) when you buy a business is critical and often overlooked, along with the Intellectual Property element of Due Diligence.

I.T. and Intellectual Property (IP) Due diligence are closely related and both are often done at the same time. This process can be very technical and often involves complex federal law. If your attorney is not familiar with intellectual property law you might, dependinging on the value you assign to the intellectual property, want to seek an attorney or  Intellectual Property Due Diligence expert who specializes in these somewhat arcane issues.

I.T. & IP due diligence have some common elements and one of the most important is to make certain who actually owns the IP often associated with I.T. value in a business.

Note: To mitigate risk, “involve IT professionals as part of the deal team to help assess a broad overview of the IT landscape of the target firm and identify any substantive issues that may exist early in the deal making process.” John Beauford, director of IT at Doctors in Training.

The law related to ownership of Intellectual Property can be confusing. A common question is, when the business had it’s website developed does the business have written confirmation that the intellectual property (i.e., the website content and design) is owned and is the legal property of the business? Just because an employee did the work it doesn’t necessarily mean the business owns the IP. This is something to think about as a business owner regarless of if you are considering buying or selling a business.

Another area is IP related to Trademarks, Patents and Pending Patents all of these usually require third party confirmation or transfer.

If the IP and I.T. of a business is a significant part of the value of the business you are buying it’s probably a good idea to put in the time to investigate the issues and engage some legal expertise to make sure that you will own or have the rights to the IT/IP after you purchase the business.

Diversify Your Business

Diversify Your Business

4 Ways to Eliminate Customer Concentration and Build Confidence with Prospective Buyers 

It’s value suicide. A company with more than 15 percent of its revenue with one customer is at high risk of having the rug pulled out from under them.

As the owner of such company, it’s going to add difficulty when it comes time to sell.  And for any potential buyer, the risk is higher unless you can prove growth potential by finding more like customers, and fast.

If you are preparing your business for sale, you need to start to think like a buyer. If you have customer concentration issues, stop looking at the business as the operator and start looking at it from an opportunity and sustainability standpoint—especially under new ownership. Remove yourself, your history and past knowledge from the business, because that is exactly what a buyer is going to get.

There’s no doubt that you worked hard at building long-lasting customer relationships, especially with a major client. But in selling your business, it’s a red flag.  It’s risky. That client could leave shortly after you are gone. The buyer will always be fully aware of such risk and there’s no hiding it.

Here are some ideas on how to minimize that risk for the potential buyer and better position your business for a premium value:

Remove the Client Trap

You aren’t alone, a lot of business owners fall into this trap. It’s easier to please and upsell existing clients than it is to look for new business.  Start looking for “like clients”.  Every good client is a profile for another new client. Same size, same problems or same needs, figure out the key component and start looking for a new client that mimics your cash cow.

Ask for Referrals

Happy clients are also happy to refer you to others.  It’s the entire basis of the Net Promoter Score and why so many companies are using it not only to improve customer service but to prove viability of the business.  If you don’t ask for referrals, you won’t get them.  Stop by or give your best customer a courtesy call, let them know you are looking to grow your business and ask if they know of any other business that could utilize your services. If not now, ask them to keep you in mind.  In some cases, businesses offer a referral fee. This may or may not work for you, but it’s another option to reward the referring party.

Seal the Deal in Writing

When you have a customer or client who is a significant portion of revenue, get the deal in writing including the duration of the agreement. Although contracts can be nullified post-transaction, at least the contract minimizes the risk of them leaving and gives the new owner some peace of mind.

Remove Sole Dependency

Many times in key accounts like this, the customer has become dependent on you. They want to only work with you or negotiate with you.  Start to transition this responsibility with another team member now, even if you aren’t looking to sell right away. The customer needs to transfer their confidence from you to the business. This will add even more assurance to the prospective buyer.

Minimizing risk is the number one thing you can do before listing your business on the market. The less risk there is, you can sell for more and sell faster. Customer concentration is just one area to reduce that risk. Keep reading our blog as we go through other areas to increase the salability of your company.