The oldest of the baby boomers currently are winding down their careers, including thousands of manufacturing business owners. A 2011 American Small Manufacturers Coalition poll showed that almost 60% of the firms surveyed anticipated a possible leadership change within the next five years.
Unlike previous generations, however, baby boom entrepreneurs are expected to face fierce competition when courting potential buyers. As many as 3.8 million baby boomer–owned companies will go up for sale in the next two decades, according to a 2012 report by SME Research.
If you’re considering selling your manufacturing company, do you know how to position it for a successful sale amid the buyers’ market of the coming decades?
Finesse your exit strategy
Exit planning is the process of creating a transition plan for your company in the event of a sale, transfer to a family member, or your death or disability. The process ideally starts your first day in business and evolves as your company grows. After you’ve decided on an exit strategy, it’s important to assess your business’s growth, assets and human resources continually. Then refine your approach if necessary.
For example, let’s say your 10-employee company currently generates $5 million per year. To successfully sell it in 2025, you estimate that the business will need to generate $12 million per year with 17 employees. By checking your progress quarterly, rather than annually, tweaking your plan will be an easier process.
The specifics of your exit plan may also have considerable tax implications, so it’s important to consult with your personal and business-related financial advisors throughout the process. For instance, financing the sale yourself or structuring an incremental performance-based sale may lower your tax bill. By not receiving a lump-sum payment, you may cause your annual personal income to be lower. Even more, by not requiring a large upfront payment, you may attract a larger pool of potential buyers who may bid up the price.
Another important aspect of preparing for your departure involves identifying and assigning successors for yourself and other senior managers. Potential buyers typically want to see that a succession plan is in place, so that key day-to-day functions and responsibilities will be executed seamlessly in your absence.
With the glut of baby boomer–owned manufacturing companies hitting the market in the next 15 to 20 years, potential buyers will take a hard look at your plant’s fundamentals ahead of any sale. But by starting the assessment process early, you can ensure time will be on your side.
After finalizing your exit plan, determine the fair market value of your business. This will give you a complete picture of where your business stands and allow you to identify any potential weaknesses that could hinder a sale down the road or lower your plant’s price tag. Generally, your company’s appraised value comprises future earning potential and any assets, including real estate, inventory, patents, machinery, vehicles, tools and other equipment.
But the devil is often in the details. So to obtain a complete financial snapshot, it’s important to supply the appraiser with as many financial records as possible. Provide five years’ worth of balance sheets, profit and loss statements, tax returns, leases, contracts, property assessments, payroll and personnel records, and equipment maintenance and sales records.
Put your best foot forward
Obtaining the best price for your business means accentuating its attributes and minimizing — or eliminating — any shortcomings. Do so by meticulously organizing all of your financial records, analyzing relationships with vendors and customers, and working with your financial advisor to anticipate any financial questions a potential buyer might have about the inner workings of your business.
Just before the sale, it’s important to make sure your equipment maintenance, noncompete agreements, leases, and other key legal and tax records are up to date. Your financial advisor can help you plan so that you’re maximizing profits and limiting your tax exposure every step of the way.
Sidebar: Succession planning 101
For some small business owners, developing and implementing a formal strategy to groom their replacements is near the bottom of the priority list. But by not having a succession plan in place, you may be putting your business, employees and estate at risk by creating uncertainty of who’s in charge and responsible for what, if you die or become disabled.
A succession plan is critically important in a small manufacturing business, which thrives on institutional knowledge and internal processes, vendor and customer relationships, and deep industry know-how. Starting the process early takes some effort, but it will allow you to direct your plant’s progress in the event of your retirement or death or the company’s sale.
SCORE, an SBA-affiliated small business organization, recommends these five steps to establishing a successful succession plan:
• Choose your successor.
• Develop a formal training plan for your successor.
• Establish a timetable.
• Prepare yourself for retirement.
• Install your successor.
If you anticipate a sale in the next five years, it’s also important to put succession plans in place for top managers and other key employees. Grooming your successor also may coincide with the ownership transfer of your plant.