Quality Practices Can Help You Prepare to Sell Your Company

When quality is documented and addressed, the ability to get top asking price is improved

Published: Monday, November 11, 2019 - 13:02

Just as baby boomers on the manufacturing plant floor are getting ready to retire, so are the owners. More than 5,000 small manufacturing operations (with annual revenues between $2 and $20 million) will either close their doors or find new owners during the next five years.

Some of these owners are motivated to keep the business running for their seasoned and experienced employees. Others really want to “cash-out” after decades of hard work. What few of these founders/owners consider is what they can do during the next year to help their businesses be seen as attractive and worthwhile to prospective buyers.

Ironically, as many of these small-business owners have gone through the rigors of lean manufacturing on the plant floor, getting a company primed for sale involves the same rigor to understand the mindset of the prospective buyer. Because Accelerated Manufacturing Brokers deals only in the manufacturing sector, years of experience have taught the team what buyers want to see—and similarly what they want to avoid.

It is not realistic to ask a manufacturing seller to take off his “owner mindset” and think like a buyer. Rarely is that kind of objectivity possible. Owners see their business as their baby, and no one wants to be told, “You have an ugly baby.” So, if selling is a sincere objective, the eyes of an objective broker is akin to a lean consultant who conducts a series of kaizen events in an effort to maximize continuous process improvement and to secure top price for the sale of the manufacturing enterprise.

To help walk manufacturers through these steps across the finish line is often personally challenging. To map the process, I wrote The Definitive Guide to Preparing Your Business for Sale. The following chart indicates the main elements involved.

Other data points are needed, such as a list of inventories, including raw material and finished product. For finished product, both costs and the price charged to the customer must be documented. A list of all insurance policies with costs is essential, as is information regarding employee benefits.

An employee census should be documented that includes each employee’s role or position, date of hire, rate of pay, and date and amount of last raise. Buyers will want to have information on the real estate, whether owned or leased.

During the past few decades, the characteristics of the new buyer have changed. There is an increasing emphasis in sales, marketing, and business development skills. New buyers are frequently from other sectors with less manufacturing experience. This new breed of buyer wants to know that the fundamental issues of quality are systemically addressed.

Quality: Making a manufacturing company attractive for sale

Manufacturing buyers want to know that risk has been mitigated by the seller. A high defect rate, product return rate, retooling, and rework are clear signs that QA/QC standards are failing.

Quality initiatives, such as Six Sigma, measure the capability of a process to perform defect-free work and often involve tracking defect rates. However, the term in practice is used to denote more than simply counting defects. Failure rates are not the only metric buyers consider. Small and midsized manufacturers that actively utilize lean manufacturing, lean Six Sigma, and theory of constraints (ToC) strategies have demonstrable evidence of continuous process improvement.

Corrective action

Regardless of the industry, there must be a documented risk-management process. This reassures the acquiring buyer that should a quality challenge occur, there are clearly defined standard operating procedures (SOPs) to handle the problem.

Corrective action is a process of communicating with employees to improve attendance, unacceptable behavior, or poor performance. Action previously taken to eliminate the cause of a detected nonconformity illustrates for a buyer how this would work in the short and long term. Where there is more than one nonconformity, corrective action is taken to prevent recurrence. Correction relates to containment, whereas corrective action relates to root cause.

The new buyer may come from a hedge fund or large bank or corporation. Although the QA/QC issues are different in manufacturing, these prospective buyers understand documented processes. These are the best indicators of whether a manufacturing company will be sold. With a business’s quality standards established, many buyers’ fears are removed. When quality is documented and addressed, the ability to get top asking price is improved.

About The Author

Frances Brunelle

Frances Brunelle is the founder of Accelerated Manufacturing Brokers, Inc., which specializes in the sale of lower middle market manufacturing companies nationally. Fran and her team help to ensure the continuity of U.S. Manufacturing by transitioning ownership to the next generation of entrepreneur. Fran writes on topics that help manufacturing business owners prepare their companies for sale and navigate the sale process to ensure a positive financial result in support of their retirement.