Prepping and selling a metal fabrication business, Part I

The pandemic is on the run and industry is recovering—well, some industries have been in a state of recovery for quite a while now—but for some companies, it’s not business as usual. Those entrepreneurs who had been thinking about selling their companies should know that merger and acquisition activity is going full tilt right now, so this might be a good time to sell. Getty Images

Studies show that an estimated 12 million baby boomers own small businesses in the U.S. Of those 12 million, about 70% will retire in the next two decades. Although my parents sold their business—the one I grew up in—not long ago, they certainly fit this description. Their experience went well; they had a good handle on managing the transition, and while many family businesses are sold to family members, my parents found a suitable nonfamily buyer. There aren’t enough words to explain how beneficial it was for all parties involved.

The reality is that many manufacturing companies don’t have a natural succession plan. If no family members or others employed by your business are interested in purchasing the company and becoming entrepreneurs, looking outside of the business is the next option, but how do you get started? I interviewed Steve Hammes and Jim Schmitt from Integrus Consulting, a brokerage firm that specializes in mergers and acquisitions, to get some insight.

How long does it typically take to prep and sell a business?

“Begin with the end in mind,” as Stephen Covey would say!

You, the owner, should start planning at least three years ahead of your desired exit date, and perhaps as early as five years ahead. For a third-party sale that involves engaging several prospective buyers, you can expect a six- to nine-month process from the date the business is ready—the day you start marketing it—until the sale closes. If you sell to the first buyer that comes along it can be even shorter, but the terms aren’t necessarily going to be optimal for you.

The big step is getting the business ready for a sale. For example, the time and effort needed to develop a business sale information package can be significant. It is amazing how many businesses do not have some of the most basic information, such as a current organization chart with position descriptions. An ownership team that lacks this level of documentation is in for a long, hard road before they’re ready to sell.

Other concerns are strategic, involving company management and intellectual property (IP). Getting a competent and motivated management team in place with incentivized compensation systems and proper IP protection usually takes more than two to three years.

What is the very first step in the process?

The first step is to have an objective party estimate the value of the business and, more importantly, how buyers (both financial and strategic) view and determine business value. This process should involve an assessment of the status of key business value drivers and to what extent these need to be (or can be) strengthened. This becomes the roadmap for getting the business ready for sale.

For instance, business value is driven by earnings and risk. In a situation in which one customer represents more than 10% of sales, most buyers perceive excess risk, which raises their required rate of return to compensate for that risk, thereby reducing the business’s value. It’s important that you understand this from the potential buyers’ perspective. Changing the customer concentration can be a long haul, but if you can do it, you’ll lessen the perceived risk for such buyers. This is just value driver, of course.

Some value drivers are more important than others to certain buyers. For example, if the buyer already owns a business, it might want your customer base for its other products. Others may want your products and workforce to supplement their product offerings. Others may most value your location.

Part of assessing a business’s value is estimating the after-tax proceeds to the seller. Will it be enough to provide the financial independence or security you are seeking? If not, a business value enhancement plan is probably warranted.

Such a plan is written strategy that demonstrates that the business is positioned to perform well when the owners exit. The plan should include, but isn’t limited to, a well-defined organizational chart with a plan for adding head count as the business grows; revenue projections for three to five years with growth forecasts for the customers and their industries; maintenance plans for equipment; a defined capital expenditure strategy that looks out three to five years; and a diversification strategy to ensure one customer or industry doesn’t dominate the revenue stream. Of course, the most significant driver of business value is a cohesive, dynamic executive team that will continue to run the business after the sale.

What are the missteps you see most often?

• Selling to the first buyer that comes along.
• Signing a nondisclosure agreement (NDA) too quickly.
• Accepting seller financing on terms too favorable to the buyer.
• Unreasonable expectations on business value.

How does a company find buyers?

We differentiate between financial buyers and strategic buyers.

If your focus is on maximizing after-tax sale proceeds, you should pursue strategic buyers—major competitors, major customers, or suppliers, usually in the same industry. Such a sale is based on the idea that business combination synergies justify better valuations for the seller (summed up as 1+1=3). Financial buyers usually are private equity or investment companies or family investors, although some of these may have strategic buyers in their existing portfolios.

You can find buyers through market research using industry and trade association lists and other public information. Ask other players in the industry who may be looking for acquisitions. You can even do some fishing around with potential buyers you are familiar with.

We are a member of Axial, which is a platform in which businesses for sale can post nonsensitive information. Often the buyers who search Axial and other such platforms are private equity and financial buyers, but occasionally a strategic buyer pops up. Beware of brokers who rely primarily on their past and existing relationships. Their barrel can get empty rather quickly.

The key to sourcing is to get to the decisionmaker in an organization. This is usually a busy, no-nonsense person who will tell you very quickly whether the business you represent is of any interest. If so, they will want to learn more. Most understand the merger and acquisition process and respect NDAs.

Is the current market good for owners thinking about selling?

Right now, in the middle of 2021, the market is very good for sellers. Earnings are generally good and businesses are looking to invest and grow. Interest rates are low. Quite a bit of private equity and investment fund capital is looking for acquisitions.

This doesn’t mean that the process will or should go quickly. You certainly don’t want to lose sight of your goals and simply sell to the first interested party. Signing an NDA is one thing; negotiations are something else altogether. Final negotiations can get tough, and having the mental freedom and leverage to walk away is the position you want to be in. Owners like you learn a great deal from false starts and are better prepared for the next round.