Selling a Manufacturing Company

Mar 10, 2020

2019 saw the United States government successfully negotiate new trade agreements with Canada, Mexico, and China.   Factors motivating these negotiations included a desire to encourage manufacturing companies to build and enhance plants in America, create employment opportunities in the manufacturing sector, and generally stimulate the economy.  It is anticipated that the Pacific Northwest will benefit from these trade deals as a location for a diverse spectrum of manufacturing companies ranging from aerospace to marine and wood products and from consumables (Bakery, Coffee, Chocolate, Produce, Seafood, Wine, Spirits, etc.) to artistic products and technology. The region also offers manufacturing companies a low cost for power, multiple seaports for international shipping, and a desired living environment for recruiting employees domestically and internationally.  The marketplace for the sale of manufacturing companies was already robust in the Pacific Northwest prior to these trade deals with many professionally represented companies selling at a premium value with multiple buyers competing to complete acquisitions.  It is anticipated that this marketplace will remain strong in 2020.

The timing may also be unique in 2020 for entrepreneurs wishing to maximize the net proceeds from a business sale.   Presently, the long-term capital gains tax rate is on the low end of its 15 to 35% fifty-year range at 20% for most IBA facilitated transactions.  A change in the presidency in November could result in this tax rate being revisited by the next Congress.  A 10% change in the rate to 30% in 2021 could result in the loss of hundreds of thousands of dollars for a selling business owner at the time of sale.  If you are contemplating a sale of your business in the next couple of years it is recommended that this potential movement in the long term capital gain tax rate be taken into consideration when strategic planning with professional advisors.  This knowledge is an example of the information IBA provides to its clients as a market leader in the sale of privately held companies and family businesses in the Pacific Northwest.

The following is an overview of the skills & services offered by IBA’s experienced and knowledgeable professional intermediaries serving the manufacturing sector.

Business Valuation – The first step in the sale of a manufacturing company is to determine the price it should be offered to potential buyers.  Business valuation is a sophisticated, subjective science that requires an understanding of the accounting models commonly employed by manufacturing firms; the valuation models of privately held companies currently being employed in the marketplace; the market environment for similar companies in the relevant industry niche & geographic area; and the financing conditions that exist to support acquisitions in the manufacturing sector. All four of these factors are critical components in properly valuing a business for sale. Business owners are cautioned against having a party value or represent a business for sale that is not active in the business brokerage marketplace for manufacturing businesses, as lack of knowledge of recently completed transactions, the market conditions created by buyer demand, and acquisition financing availability can result in a business being improperly valued. An improperly valued business traditionally sells at a lower price with a longer time period of exposure on the market.  Neither of these outcomes are good for an entrepreneur desiring to sell or the company being sold.

Business owners should also be wary of firms that either outsource their business valuations or take businesses to market without an established value.   The best business brokerage firms have the knowledge, experience, and ability to value businesses “in house”.  A business value needs to be justified & persuasively sold by a business broker to the buyer, their CPA or CFO, their attorney, and bank and/or investors to successfully complete a transaction.   A business broker that does not understand the sophisticated intricacies of how & why a specific value was assigned to a specific business will be at a disadvantage when selling the manufacturing company and fail to close potential buyers.

A school of thought also exists in the business brokerage community where businesses are sold in an auction environment without assigning a price to the business.  In theory, this can sound attractive to a seller, however it has been our experience at IBA during our 45 years selling privately held companies that this strategy results in lower prices in the marketplace than a value that is established and justified by a knowledgeable mergers & acquisitions intermediary.  The reality of this situation is the business is going to be professionally valued by buyers. No buyer is going to make the first offer at the high end of a valuation range.  Negotiations are going to occur between knowledgeable, professionally represented parties.   A competitive marketplace will always increase the value of a company being sold. The question a seller should ask is do they want to establish the market price or passively allow it to be established by a buyer that has a vested interest in acquiring the business at the lowest possible price.

IBA offers complimentary professional opinions of market values of businesses to potential clients.  100% of IBA’s fees are paid on performance upon completion of the sale.  This business model encourages an honest assessment of value and makes the business broker accountable for delivering their price in the marketplace.  Most businesses sold by IBA sell within 10% of the price we go to market and the final sale price is often in alignment with our precision assessment of value that is a component of our business evaluation.  IBA represents and has the ability to professionally value manufacturing companies with values ranging from $1 to $25 million.

Professional Sales – The successful sale of any product or service requires a presentation that persuasively articulates the attributes & benefits of the item to a potential buyer.  Professional representation of a manufacturing company requires an individual that can convey the unique attributes of the business, financial history, market niche, and future opportunities presented for the company.  If this cannot be accomplished, the company will not sell or will sell at a value reflective of the amount of information conveyed.  It is recommended prior to selecting representation that business owners have the party convey to them an overview of their business model and competitive advantages of their business to assess the level of knowledge and sales skills of the individual.    It is also important to select a broker that has successfully completed transactions involving manufacturing businesses and has ongoing engagement with the different demographic groups of buyers interested in acquiring companies in the manufacturing sector.   A few of the demographic groups currently acquiring companies in the manufacturing sector include companies increasing market share in an existing niche; companies bringing manufactured components in house to control production schedules and supply;  companies desiring to increase domestic production; private equity firms, search funds;  non-profit corporations; and individuals with relevant experience desiring entrepreneurial investment opportunities for direct management.  IBA interacts on a regular basis with all of these buyer demographic groups and maintains a database of buyers actively seeking acquisitions in the manufacturing sector in the Pacific Northwest. It is common for multiple offers to be generated in a short time frame for IBA clients from this database in the manufacturing sector.  Many of the buyers in IBA’s buyer database are only actively engaged in the mergers & acquisitions marketplace in the Pacific Northwest with IBA based on IBA’s reputation for confidentiality, integrity, and “best practices” in facilitating the sale of a privately held companies.

Experience –   The probability of achieving the successful sale of a business is enhanced with the engagement of experienced representation to value, market, sell, negotiate, and facilitate the transaction process.  There is no substitution for knowledge & experience.   Business brokerage is a business best learned through action and repetition.  No business owner wants to be the “trial client” for a business broker to gain the experience necessary to be successful in one of the most sophisticated sales professions in the business world.   All business owners want to employ a firm that has the ability for their broker to reference prior personally facilitated transactions, similar negotiations, professional colleagues that have facilitated similar transactions, and relevant conversations with prior client attorneys & accountants during the sale process.

Resources – Navigation of Class III & IV rapids in a kayak in the Pacific Northwest requires experience, knowledge, a professional skill set, and proper equipment for the journey.  The sale of a business also requires the appropriate resources to complete the transaction. Business sale resources are commonly cerebral in nature.  They include a business attorney cognizant of the “best practice” legal verbiage components employed in a mergers & acquisitions transaction involving a manufacturing company; a CPA with the ability to mitigate the tax implications of the transaction for their client, facilitate due diligence efficiently & effectively, and having prior experience valuing components like work in process; and bankers at lending institutions actively engaged in acquisition financing in the manufacturing sector.  Frequently IBA’s clients bring skilled attorneys & accountants to transactions.  Equally common are situations where IBA M&A intermediaries are asked for recommendations of legal & accounting professionals with relevant experience related to the purchase & sale of manufacturing companies.  We are happy to provide referrals of professionals who have performed at superior levels for their clients in previous IBA facilitated transactions.  IBA is also commonly asked to refer bankers experienced with financing manufacturing company acquisitions to buyers.  We view this as part of our seller representation role, as a transaction cannot close without sufficient capital.  Knowing how & where to access acquisition capital is a valuable resource for completing mergers & acquisition transactions.

The sale of a manufacturing company can be compared to a game of chess.  Anyone can sit down at a chessboard and play a game.  However, victory at chess is rarely luck.  The same is true for selling a business.  Anyone can attempt to sell a business.  However, only the most experienced, knowledgeable business brokers with the highest professional skill set can consistently deliver premium prices for their clients in a transaction facilitated employing “best practices” while maintaining an environment of confidentiality throughout the sale process.  IBA has successfully facilitated 4000 transactions since 1975 for our clients in the Pacific Northwest.  Many of those transactions involved manufacturing companies.  If you are interested in selling a manufacturing business, we would welcome the opportunity to convey IBA’s sales strategy for achieving the best possible outcomes for our clients in a timely manner.

IBA is one of the few mergers & acquisitions firms in the Seattle metropolitan area that has been invited to be a resource and participating member of CAMPS, the Center for Advanced Manufacturing Puget Sound.  Additional information on CAMPS can be found, if you attend one of their excellent events it is my hope that you introduce yourself to a member of IBA’s manufacturing sector transaction team.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.