Small manufacturing businesses have an important function in the U.S. economy.
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Unlike large manufacturers, small business manufacturers are flexible and nimble, capable of quickly responding to changing conditions and exploiting opportunities in the marketplace.
But when it comes to business sales, small and large manufacturers face the same set of challenges. Manufacturing businesses are different than retail or service companies, especially in the way they prepare for ownership transitions. Although they may have intangible assets, most of their value rests in the equipment and capital assets they use to manufacture their products.
Selling a manufacturing business is dicey because you want to avoid a valuation based solely on the value of your assets. To do that, you'll need to make the case that the companies' intangible assets will translate into bottom line profits. Here are a few things to consider along the way . . .
- Market position. Buyers are attracted to manufacturing businesses that have an established presence in the marketplace. During the months and years leading up to the sale, make an effort to capture the highest possible percentage of market share. The payoff is that your market position represents an intangible asset that with real value to buyers.
- Business cycle. Most manufacturing firms have a predictable life cycle. During the early years, the business may have burst onto the scene with innovation products and processes. But as time goes by, innovation tends to fall by the wayside. An innovative company culture is an intangible asset that needs to be nurtured through an intentional effort on the part of owners and managers.
- Asset condition. Equipment maintenance schedules can increase the value of your tangible assets. Instead of being appraised at average values, well-maintained machinery can be valued at the high end of the scale – but only if you can support the valuation with maintenance records.
- State of technology. It's not hard to understand why prospective buyers shy away from businesses with outdated technology. To compete in the marketplace, they'll need to invest cash in technology upgrades, not to mention the time and effort that is involved with retraining the workforce on the industry's current technologies. Make the investment in new technology before the sale – you'll likely recover the cost plus a dividend in negotiations.
- Consolidation. The manufacturing sector continues to experience high rates of consolidation. When it's time to sell your business, approach buyer candidates with a "more than a sum of the parts" argument for consolidation.