We own a small precision machining shop in the Midwest, about 40 employees, been in business 22 years. I'm starting to think about an exit in the next 3-5 years. What's the best strategy to actually sell a manufacturing business like this? I keep hearing different things from brokers, accountants, and other owners. Some say just list it and see what happens. Others say you need to spend years cleaning up the books and building a management team first. I'd rather not waste time or money on the wrong approach. Where do I even start?
Selling
What is the best strategy to sell your manufacturing business?
If you're 3-5 years out, the answer is pretty straightforward: start preparing now. Most manufacturing businesses under $10M revenue sell for a multiple of adjusted EBITDA and buyers will beat you up over customer concentration, outdated equipment, and owner dependence. Get a quality of earnings done early so you know what you actually have.
What barnwood said. Customer concentration is the first thing a buyer will look at. If one customer is more than 20-25% of revenue, expect trouble.
Don't tell your employees until you absolutely have to. I've seen deals fall apart because word leaked and key machinists got nervous.
I'll push back a little on the secrecy thing. In a 40-Person shop, the top two or three people will figure it out during due diligence no matter what you do. If you spring it on them at closing you can lose your best people right when the new owner needs them most. Better to have a plan for retention and be honest with your key guys once you're seriously in talvks.
What's your adjusted EBITDA range? That changes the whole strategy. Under $2M and you're mostly looking at individual buyers or strategic bolt-ons. Above $3-4M and you start attracting private equity and search funds who will want a Management team in place.
Probably $1.8-2.2M adjusted depending on the year. We had a rough 2023 with a big customer puling work back in-house, so that number is a little soft right now.
That customer pull-back is exactly why you don't rush. Fix the concentration, get two or three new accounts ramped up, and your multiple will improve more than the revenue alone would suggest. Buyers pay for predictability.
Also look at your equipment list. If half your CNCs are 15+ years old, a buyer will discount hard or want you to finance the replacement. Either reinvest now or be ready to take the hit.
Get a good M&A avisor, not just a business broker. Manufacturing deals at your size need someone who understands quality of earnings, working capital adjustments, and earnouts. Brokers list businesses. Advisors sell them.
Earnouts are the thing nobody warns you about. You think you're selling for $8M and half of it is contingent on hitting numbers for two years under new ownership. Read those clauses carefully.
This is why I said don't tell employees. If the earnuot depends on the same people staying and they know they can leave for the competitor down the road, you're in a bad spot.
We're going in circles on the employee point. Agree that retention is critical, disagree that secrecy solves it. Any decent buyer will want to meet managgement before signing. You can't hide a 40-person shop from itself.
One thing I haven't seen mentioned: get your contracts and and IP in order. Customer agreements, supplier terms, any proprietary processes. If your biggest asset is tribal knowledge held by you and one other guy, buyers will notice and price accordingly.
Good point. Also start documenting your processes now. SOPs, job costing, maintenance schedules. It makes the business look institutional rather than personality-driven, and it speeds up due diligence.
Appreciate the input on the earnout and quality of earnings angle. The customer concentration issue is the one keeping me up at night. I'm going to spend the next year or two diversifying before I talk to any advisors.