A recent business article estimates that nearly 125,000 manufacturing companies are owned by the baby boomer generation. As that generation nears retirement, decisions are looming about how they will handle the turnover in leadership. 

As the owner of a manufacturing company, you’ve worked hard to build your business into a successful enterprise. You’ve invested your heart, soul, and countless hours into making your operation the best it can be, but at some point you’ll need to begin the process of succession planning. 

And that means making tough decisions. Does your business pass down to family members? Do you sell to a competitor or someone else entirely? What is the actual valuation of your company? Whether you plan to retire imminently or within the next 5 or more years, succession planning is a process that you will need to undertake sooner than later. 

Today, Manex will share our advice on how to navigate the process of manufacturing company valuation and succession planning.  

The Importance of an Exit Strategy for Manufacturers & Distributors

Understanding the Importance of Succession Planning

Succession planning takes a strategic approach to a transition of power and ownership in an organization. Having a well-developed succession plan is important for both personal and business reasons. 

Personally, succession planning helps you gain a clear picture of the value of your company. With an accurate understanding of your company’s worth, you’ll be able to ensure financial stability in your retirement. Succession planning will also help you understand the tax implications of your exit strategy.

Succession planning also removes the stress of navigating a transition of control. Whether you plan to hand off your business to family members, or wish to sell the company, doing the leg work ahead of time ensures a smooth transition when you’re ready to exit. It also serves as a safeguard if health or other personal matters require an early exit. 

Business-wise, succession planning helps to minimize risks and set the company up for a successful transition. It ensures that day to day business operations will not be negatively impacted by your departure, and that any prospective buyers will be able to keep the operation going with minimal disruption. 

Even if you do not plan to retire imminently, strategically planning for your eventual exit will help you explore options and be prepared for unforeseen circumstances. 

Manufacturing Business Succession Planning

So where does manufacturing business succession planning begin? The first step is determining your company’s worth through a process called valuation.

Manufacturing Company Valuation

Valuation is the process of analyzing a company’s performance, assets, debts, and other obligations to determine the economic worth of the organization. Attaining an accurate valuation of your company is essential to determining your exit strategy. 

It is highly recommended that you work with a valuation expert familiar with the manufacturing industry because of the unique industry-specific considerations involved. A valuation expert who knows manufacturing and distribution will be able to offer a balanced view of your organization, that takes into account the value of equipment, facilities, and inventory, along with the current market value of similar businesses. 

Preparing for a Transition of Power

With a valuation set for your company, you can begin the process of planning for a transition. The most important aspect of preparing for this transition is to reduce the risk associated with your exit, so that potential buyers will feel comfortable with the purchase. 

With any transition, the level of owner dependency is always a key factor. If you as an owner are heavily involved in day-to-day business dealings, how will your departure affect the organization? If your exit leaves the organization in disarray, buyers will be less likely to take the risk of acquiring your company. 

That makes it essential that your business be set up to run without you. This means having a strong management team in place. Documenting your strategies, operating procedures, vendor agreements, and other alliances is essential so that someone else can take over without the company suffering. 

Even if you are planning to leave the company to members of your own family, there must be a way to transfer your institutional knowledge to them when you step down. This can also mean preparing those already in your organization to take on greater responsibility once you move on. 

Manufacturing business succession planning also means taking a thorough evaluation of gaps in your company’s performance and operations. 

Does the equipment and technology you utilize still get the job done? Will new ownership need to invest significant capital into new equipment, or developing new procedures? 

Addressing these concerns before you are ready to transfer power can increase your valuation and the likelihood of finding the right buyer. 

Business Exit Plans For Distributors and Manufacturers

With a valuation set for your company, and your company prepared for you to hand over the reins of power, you will have several options for your exit.

  • Pass the Business Down – For many, keeping the business in the family is a priority. It can instill a sense of family pride for generations, and potentially offer greater stability than selling to an outside buyer. This can also allow you to keep a financial stake in the business. However, passing the business down is not without risks, as it can cause family conflict, and even raise concerns from within about the suitability of family successors.
  • Sell the Business – Selling a business often offers the biggest financial return. Injecting outside knowledge and resources can even take a business to new heights. But selling can also divest you completely from the business you created, which is not ideal for some.
  • Merge with a Competitor – Merging with a competitor can also be financially enticing, and can be favorable for the business as a whole. 
  • Employee Ownership – Issuing an Employee Stock Ownership Plan (ESOP) lets ownership be transferred to employees through shares of stock. This can be a way to encourage employees to perform better, as well as give them a sense of ownership. 
  • Liquidation – If the valuation of your company is substantially less than desired, or if it is no longer viable, a final option is liquidation of the company and assets. However, this is seen as the least beneficial option, not only to yourself, but to your employees as well. 

5 Tips for Maximizing Your Manufacturing Company’s Valuation

Before you are ready to obtain the valuation of your company, there are a few things you can do to maximize your company’s value. 

  • Invest in a Strong Management Team – Prospective buyers will want to know that the company will not fall into disarray when you retire or move on. By having a strong and capable management team in place, your business will continue to function smoothly in your absence.
  • Diversify Customer Concentration – If your company is reliant on one or two customers for the majority of its revenues, that can be seen as a red flag for potential buyers. Ideally, no single client should account for more than 20% of your business. 
  • Be Prepared to Show Growth – Potential investors will want to see that your company is growing, and not shrinking. Having at least 2 years of financial history that illustrate an upward trajectory of growth will have a positive impact on your valuation.
  • Show Strong Industry Performance – Investors will also want to see that you are outperforming, or at least highly competitive with your industry peers. You’ll have a better chance of reaching your valuation expectation if you can show industry-leading performance.
  • Have Your Financials in Order – Investors will want to see your financial records to ensure that you are not carrying large debt, or other financial red flags. Presenting 3-5 years of strong financial records illustrates that your business is in a strong position, and not being unloaded due to financial struggles.  

Conclusion

Whether you plan to exit now or even years in the future, business exit planning for distributors and manufacturers will ensure that you are well-prepared whenever the time comes.  

Don’t let uncertainty cloud your – and your organization’s – future. Manex is Northern California’s premiere consultant for manufacturing companies. Our industry experience has given us invaluable insight into the process of succession planning. When it’s time to begin thinking about succession planning, we are here to help you along the way. 

Ready to begin succession planning? Contact Manex today for a FREE consultation. 

Don’t wait any longer to begin business exit planning for distributors and manufacturers. Contact Manex today and let our team of experienced consultants help you plan for a smooth transition into retirement.