The Middle Market Review Insights on the Middle Market.

Subscribe Subscribe

Subscribe Today

Please provide valid email address

I want to receive:

Thanks for subscribing!

CEOs

6 Essential Activities for Manufacturing CEOs Before a Deal

Tags

Hiring the most skilled workers, integrating new technologies, and increasing efficiency can take up most of your time as a manufacturing CEO. But planning for an eventual exit requires attention well in advance of a sale process.

We asked investment bankers and investors to highlight the most important things for manufacturing business owners to keep top of mind before a transaction.

1. Tighten your labor practices.

All manufacturing companies rely on the productivity of their employees. Changes to leadership and ownership can spur rumors and slow production, especially at unionized companies.

To prevent employee turnover, dissatisfaction, poor work quality, and strikes, Stephen Lewis, Managing Director at Headwaters MB recommends creating a comprehensive communication plan before the transaction. “It’s important to take control of the process of communicating details about ownership shifts well before it becomes a problem,” he says. “Keep your employees engaged throughout the process and be sure to review your union contracts, if they exist.”

2. Think strategically about your CAPEX.

A timely investment in modern technologies or updated machinery can significantly increase the value of your business when it’s time to exit.

“Newer machines allow higher output per unit of time and tend to run more efficiently. These factors result in lowering cost/unit and increasing profitability margins,” says Elie Azar, CEO and Managing Director at White Wolf Capital. “I would recommend keeping a simple CAPEX analysis that is updated in a timely manner so you can effectively and accurately bifurcate between maintenance and growth CAPEX.”

Having a firm grasp of your capital expenditures is important regardless of your exit timeline. Not only is this money that the buyer doesn’t need to spend down the road, it can increase profits while you’re still operating.

3. Consider your options for diversification.

Diversification is difficult and not always proven to work — so waiting until right before you want to sell can dissuade a buyer’s interest in your business, or lower the final valuation.

“Entering a new market takes years, especially if it’s a market categorized by long lead times and supplier qualification requirements,” says Istvan Nadas, Senior Analyst at IGH Holdings (subsidiary of Dunes Point Capital). “If you’re not willing and able to stay on board through the long timeline of diversification, you may benefit more from focusing on operational issues such as labor overtime or reducing scrap in the production process that can impact your P&L every week.”

Consider hiring a consultant or banker who can help you with a cost-benefit analysis of your plan.

4. Do diligence on each location and product line.

“Many companies report gross margin for the total company, but rarely is an accurate margin presented by product line or location,” says Joanna Brumsey, CPA of Wall, Einhorn & Chernitzer in her report on due diligence. “Without this information, it can be very difficult for a potential buyer to determine whether to continue or discontinue certain product lines or to close certain locations.”

Having an understanding of the profits and potential risks of each product line and business location before you enter a sale can save time and money down the road.

“I would even suggest doing environmental diligence on each property to be sure you’re not transferring the title of contaminated land,” says Headwater MB’s Lewis. “Better to define the property lines early than later, too.”

5. Do some serious reporting.

“Most sophisticated buyers will request a quality of earnings report,” says Steve Raymond, Managing Director at The DAK Group. “It makes sense to be proactive and do this analysis on your own, before a buyer is involved. This way if you find any issues, you can take care of them, and mitigate the problem on your own terms, in your own time.”

Along with an effective system for measure profits and losses, you may want to track and measure each by customer, product line, and end market. “It’s important to have a firm understanding of what part of the business is generating the profits,” says Christopher Sheeren, Partner at Huron Capital Partners.

6. Get to know your market, not just your company.

No matter how far away from a sale your business is, it’s helpful to speak regularly with investment bankers and consultants who can help you uncover issues within your company. “At the end of the day, it is all about maximizing value and reducing risk for the targeted new owners,” says Jim Gitney, CEO of Group50.

Knowing how your competitors and the markets are performing will help you develop benchmarks for growth so that when it’s time to sell, you’re truly ready.

 

 

Learn More About Joining Axial

Request Information

Subscribe to Middle Market Review

Subscribe to Middle Market Review

Please provide valid email address

I want to receive:

Subscribe

Thanks for subscribing!