Manufacturing businesses are growing in popularity for those expanding their portfolio of business acquisitions. The demand for manufacturers continues to rise as many companies are insourcing more of their operations. However, how can acquirers evaluate a manufacturing business to assess its true value? Read tips for purchasing a manufacturing business below.
Evaluating a Manufacturing Business
Ensuring that you don’t overpay for an acquisition and that the acquisition will retain its value, is a crucial aspect of the process. This due diligence can be segmented into three parts: past, present, and future of the business.
The “past” portion of evaluating the business consists of looking at how long the business has been around and how they’ve grown. The “present” is their current clients, projects, and profitability. Assessing the “future” of the business is tricky, but it pertains to the workforce, sales pipeline, and outlook for the industry as a whole.
Know the Numbers
When assessing a business purchase, the purchaser should dig into as many profit and loss statements as they have available. This will help the acquirer identify where the business has seen the largest growth, both in income and expenses. Reviewing these documents will also help the acquirer identify when and how the company became, or if they are, profitable.
Evaluating the customer base of a potential acquisition will give the acquirer an idea of revenue stream diversity. This often correlates to how much risk a business carries. A manufacturing business with a single client that makes up 70% of revenues displays high risk-as the client may not continue to renew contracts if the ownership changes hands.
The risk of client abandonment after a change of ownership can be mitigated by talking directly with the client, though clients may not honor their word.
Unique Product or Service
Businesses that provide a unique product, service, or process are attractive, but purchasers should assess whether the business has a monopoly or not. If the unique product or service is easily replicable and the business doesn’t own any proprietary intellectual property, competitors may take the opportunity to steal market share during the ownership transition.
Simply having a unique product or service is good, but owning rights to its production or distribution is a major benefit.
An acquirer should familiarize themself with the sector of a business they’re looking to acquire. This awareness should include not only the growth in demand but also the availability of a qualified workforce. Though a manufacturer might have access to many potential contracts, without the workforce to support them, the business could flounder or even wither.
Outlook for Primary Product or Service
Manufacturing is a massive industry with many different segments within it. Although the industry is growing, that does not indicate growth for every segment within the industry. The particular vertical that the business serves needs to be evaluated for its growth.
This can be done by comparing the revenues of the business and its direct competitors. However, an acquirer will also want to evaluate indirect competitors who seek to replace the business’s primary product or service. If an indirect competitor is seeking to make the business’s primary product obsolete, the purchaser will have to spend large quantities of resources retaining revenue streams or pivoting.
When to Seek Guidance
It’s never too early to seek guidance from a trusted partner about a business acquisition. At Richards Rodriguez & Skeith, we perform legal and contract due diligence for potential business acquisitions. Our lawyers can help you make sure that you know what you are buying and avoid costly surprises. In addition to mergers and acquisitions, we provide a full range of legal services to help you achieve your objectives, including business structuring, contracts, intellectual property, employment law and litigation support, and serve as many growing companies’ outside general counsel.
Learn more about our experienced business and transactional law practice here. For more information on this topic, contact our office today.