How to Buy a Manufacturing Business

The manufacturing industry has increasingly become a preferred option for anyone considering expanding their business acquisition portfolio. The demand for manufacturers continues to rise as many companies are in-sourcing more of their operations.  However, the major challenge for most investors is assessing a manufacturing business’s true value. Herein are tips any investor should consider if you’re looking to buy a manufacturing business.

Assessing value of a manufacturing firm

One of the pitfalls any investor should avoid is overpaying for an acquisition. They should also ensure a company they intend to buy will retain its value. The related due diligence involves comprehending an organization’s past, present, and future.

Evaluating a business’s past focus on information related to the existence length and the growth. The “present” aspect of a potential acquisition’s due diligence focuses on its current customers, projects, and financial performances. Evaluating a firm’s future is complex. It entails understanding the sales pipeline, workforce, and industry outlook relating to change.

Understanding Organizational Finances

When evaluating a potential manufacturing business acquisition, an investor should diligently analyze as many loss and profits statements as possible. Such information will enable them to know when the business has experienced the most significant expenses and income growths. Financial statements evaluation enhances the comprehension of a business’s profitability and its history to enable predicting future performances.

Customer Base

The customer base is a vital determinant of its revenue stream diversity. Thus, an acquirer should understand the company’s target market they intend to acquire. It often enhances the understanding of how much risk is associated with acquiring an existing business. For instance, a company with 70% of its sales from a single customer is risky because losing such a client would mean losing an equal percentage in revenue. After learning about the ownership switch, such customers might refuse to renew their contracts. Understanding risk in such a sense enhances a potential acquirer to understand whether the risk associated with the purchase matches the potential benefits. It might also help to negotiate for more favorable terms.

Product or Service Uniqueness

Often, the attractiveness of a business is directly proportional to the uniqueness of its offering. However, it is also essential for a purchaser to determine whether the manufacturer operates in a monopolistic market. The idea is that the more unique a business’s offering is, the less competition it faces. When assessing the uniqueness of the products or services offered by a manufacturer, the focus should be on whether its offerings are easily replicated or whether the firm owns any proprietary intellectual property. Competitors often capitalize on the imitation of products and the absence of proprietary intellectual property to acquire market share during ownership shift. Buying a manufacturer with a unique product who owns it’s own production and distribution rights should be prioritized.

Sector Growth

A buyer should be familiar with the sector of the manufacturer they intend to acquire. Their focus should not be limited to demand growth and qualified personnel availability. Accessing a significant amount of contracts without personnel to meet the requirements leads to potential floundering of resources and overall bad customer service.

Primary Product or Service Outlook

The manufacturing industry is massive and has multiple segments. The notion that the industry is growing fast does not apply to all the segments. An acquirer should evaluate a business’s targeted vertical for growth. They need to compare the firm’s revenue to its direct competitors to do so. Direct substitutes to a business’s primary offerings should also be assessed. If substitute wants to make an organization’s primary offering obsolete, the buyer would be forced to spend significantly on revenue stream detainment and pivoting.

Using Business Brokers to Find Manufacturing Businesses for Sale