It goes without saying that buyers and investors are only interested in a manufacturing business if it has high enough value. The better you can present your business’s true value to a buyer, the more likely you are to close a deal and successfully make the sale.
This guide walks you through five value-optimization tips to prepare your business for sale.
Table of Contents
1. Conduct a Profitability Analysis
Nothing demonstrates a company’s value more than its profitability. A profitability analysis examines profits from different revenue streams, identifying areas for improvement and prioritizing them.
Here are two ways to conduct a profitability analysis:
- Profitability Ratios: Profitability ratios determine how well the company can generate revenue relative to costs, assets, and equity over time. Profit ratios that are commonly used are:
- Gross Profit Margin = [(Net revenue – Direct expenses) / Net revenue] x 100
- Operating Profit Margin = (Operating profit / Total revenue) x 100
- Net Profit Margin = (Net profit / Revenue) x 100
- Return on Assets = Net income / Average total assets
- Return on Equity = Net income / Shareholders’ equity
- Customer Profitability Analysis: This evaluates a customer’s average revenue in relation to how much the company spends to provide that product or service. This helps businesses identify the most profitable customer segments, where to allocate resources, and whether to adjust pricing.
- For example, if you run a manufacturing company, consider revenue generated per client divided by total costs (production, operations, labor, materials, etc.).
2. Carry Out a Business Diagnosis
The buyer will likely want to know your company’s strengths and weaknesses, whether you’ve achieved your goals, and what your growth potential is. Take a deep dive into your company’s overall performance and identify any areas for improvement.
Use the fishbone diagram (also called the ishikawa diagram) to help map out all your business problems and the causes behind them. For example, let’s say your manufacturing company is behind on sales goals. What could be the reasons for these? The fishbone diagram outlines the main categories of the causes of this issue.
This is a rough example of what this may look like:
- Materials: Lack of suppliers
- Machinery/Software: Hardware or software not functioning properly
- People/Labor: Not enough manpower or skilled employees
- Methods: Slow and tedious processes
- Costs: Operating expenses were too high
- Measurements: Failure to meet quotas or KPIs
- Environmental: Weather affecting working conditions
The goal of this diagram is to outline all issues with the company, determine their causes, and draw actionable insights on how to solve them. You can even seek the help of experts during this process, which also helps show buyers that you have a clear plan in place for how to address these problems.
Conduct a comprehensive SWOT analysis on your own company as well as competitors in your niche. This helps analyze strengths and weaknesses in internal areas (like finance, management, HR, or operations) and external areas (such as in relation to market positioning).
3. Optimize Your Processes
You want to reassure your buyer that your business is healthy, operational, and has a high chance of growth and sustainability. One way to do this is by implementing fully optimized processes and systems to remain competitive and keep things running smoothly.
These should be concrete actions that could boost company value and performance.
For example, automation and AI are becoming more common in manufacturing, so see if and where your business could benefit from following suit.
Some ways to do this include using automation to streamline long and tedious processes to reduce manual labor. You can also use AI quality inspection tools to perform real-time monitoring and analysis on products as they’re being manufactured. It truly depends on your unique business and your particular business model.
4. Diversify Products and Services
Selling just one product or service isn’t enough and could only take you so far (unless it’s a highly specialized company and product). Make your company look more attractive and worth more by diversifying your products and services.
Diversification not only increases valuation but brings in more customers which, in turn, brings more profit. Additionally, this also means diversifying your base of suppliers, reducing the risk of supply chain disruptions if a single supplier fails to deliver.
One way to ensure diversification is by conducting a competitor analysis. Look at what competitors are offering, which products or services are successful, and which ones are adjacent to yours. Look through customer reviews to gauge your products’ reception and if there’s any gap that your new products can fill.
For example, let’s say your manufacturing company specializes in automotive parts. You can branch out and add more products that are suitable for electronic vehicles, such as batteries and charging stations. You can also add maintenance and repair services, providing a more comprehensive experience for customers.
5. Improve Cash Flow
Investors and buyers are more likely to buy a business with a strong and healthy cash flow. Take note of these three types of cash flow, which could help in evaluating your overall financial performance.
- Operating Cash Flow: Cash generated and spent from core functions and production of goods and services. This indicates the ability to cover operational expenses.
- Investing Cash Flow: Cash generated and spent on investments, including purchases or sales of assets, securities, and any long-term investments.
- Finance Cash Flow: Cash flow used to fund a company, such as debt, business loans, equity, and dividends.
One possible way to have control over your cash flow is by leasing equipment instead of purchasing it. Instead of paying a large sum upfront, you can pay in installments over the term of the lease. This also helps you match your payments with your cash flow.
Weigh the pros and cons depending on your business’s needs and financial situation; leasing can be more expensive in the long term; in those situations, you’ll likely want to buy.
Keep a clean and accurate record of all financial statements. The easier they are to track, the fewer problems and delays you’ll have in the due diligence process. This includes keeping track of the statuses of the following:
- Invoices issued to clients (Accounts receivable)
- Invoices paid by clients
- Invoices received and paid to suppliers and vendors (Accounts payable)
- Taxes withheld
Finding areas where you can cut down on time and resources also makes a big difference in managing cash flow. For example, if a supplier takes too long to package and produce products, consider finding a new supplier that works faster and is more cost-effective.
Lastly, consider an inventory write-off, which is removing obsolete or slow-moving items from your inventory. This can make you eligible for a tax deduction, removes the cost of no-value items in your inventory, and prioritizes saleable products. (Just remember to talk to your accountant first.) Instead of purchasing more of these products, you can sell them at a discount or cross-sell them with other products.
Talk to a Valuation Expert
If you’re having a hard time evaluating your Austin business before the sale, you can go to www.ibexbeyond.com and talk to an advisory team member. Working with experts in your local area and your type of business not only makes the selling process smoother but connects you with buyers who are actively looking to purchase manufacturing companies just like yours.
