A huge percentage of manufacturing companies are owned by Baby Boomers that are moving up in years. As they’re nearing retirement, many are contemplating selling their shops. If you’re in that boat, how can you prepare for the sale? What can be done to make your machine shop more attractive to buyers?
Paul Van Metre—the former President of Pro CNC and Co-Founder of ProShop ERP—shares that there are many types of buyers out there. It could be a shop that wants to acquire another shop to complement or expand their own. Maybe someone wants to buy your book of business and start using your machines to create their parts (which would be more of a strategic partnership).
There are even holding companies that specialize just in manufacturing. I’ve seen them roll up some of our clients and they own 30+ manufacturing companies. All they do is buy up firms with a certain methodology, such as companies with specific certifications.
Understanding the process of valuation
As owners, we usually have an inflated view of what their company is worth, right? Paul points out that when a business does sell, the owner gets what they want less than half the time. His goal is to educate shop owners and help them realize what’s realistic for a valuation. There are many formulas for valuation, but the multiple of earnings or profit can be quite variable. It can make a large difference in what a company is worth.
So how does a shop owner look at their business and calculate what it’s worth? How do you set yourself up for success to potentially sell at a higher price?
Paul says the first question to ask is, “Could I go on an extended vacation today and have my shop work just as well without me here?” You need to place people in roles so that this becomes a possibility. It can be a determining factor in the value of your company. If you’re intertwined in the day-to-day, it’s not appealing to a buyer. It can even de-valuate your business. Buyers will have to want to be owner-operators. An investment company or strategic buyer won’t be interested.
Paul’s experience selling Pro CNC
Paul hired a firm that came in and asked for all sorts of in-depth information to build out a report. They put together a 50–80 page book about his company that included the valuation, financials, etc. After the book was made, they turned it into an anonymous one-page document that highlighted the shop i.e. “A west-coast machine shop in the aerospace industry with 75 employees and 30 machines,” etc.
The M&A company sent that one-pager to hundreds of thousands of people looking to buy. Interested parties then signed a nondisclosure to get the full book on the specifics of the company. From there, anyone interested in buying would issue a letter of intent (LOI) indicating what they’re willing to pay. There will likely be on-site visits and discussions between the owner(s) and acquirers.
Paul emphasizes that everyone on the buy or sell side of a transaction should have both financial and legal advisors guiding them through the process. They will help you determine what’s fair and reasonable. He also advises anyone to use an M&A company because you want multiple buyers interested at the same time. Why? To start a bidding war and drive the price up.
Smaller companies (doing under $1 million) may simply be bought and sold with a local broker. The bottom line is that every business is complex and different. If you’re moving into a business you don’t understand, you want to use some caution when buying that company.
How to make your company more attractive for buyers
When Paul's client bought Hill Manufacturing, they didn’t have a list of their measuring instruments in their ERP system. Because of this, a $50,000 valuation was placed on their ancillary inspection equipment. After inputting all of their equipment into ProShop ERP, the equipment was actually valued at $150,000. Making sure that equipment was itemized in a database made it worth 3x more. That’s just one small example.
Your business needs solid business repeatable processes, people in roles executing on those processes, and cannot be tied up in the head of the owner.
How can you learn more about the process? Paul recommends a few books that people should read:
There are things that shop owners can do in the next few years to educate themselves and get things in place to dramatically improve the value of their business. To learn more, listen to episode #277 of Making Chips!
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