What You Need to Know Before Buying a Manufacturing Business
Are you searching for a manufacturing company? If so, there are several things you need to know before buying a manufacturing business. Before you make a bid to purchase a manufacturing business, conduct due diligence and keep these seven key factors in mind.
1. Are You Paying a Fair Price for Equipment and Machinery?
The company's machinery and equipment comprise a large portion of the purchase price for a manufacturing business. Therefore, consider hiring an expert to inspect and evaluate all machinery included in the sale. Request copies of all paperwork for the machinery and equipment, including the purchase invoice, maintenance records, repair records, owner's manuals, and warranty information.
2. Carefully Review Company Financials
Always look at the company's numbers. It is impossible to perform due diligence without reviewing the financials. You need to review company tax returns, profit and loss statements, cash flow statements, asset lists, debts, and balance sheets. Do not limit your review to the current and past year. You need to review the financials for at least a decade or longer to determine how the company responds to industry trends and market changes.
3. How Large is the Existing Company Base?
If you are purchasing an existing manufacturing business, you want to maintain repeat business. When buying a manufacturing business, it is helpful to include a clause in your buy-sale agreement that requires the current owner to introduce you to existing customers to help facilitate a smooth transition and retain existing business. Also, review all pre-existing contracts with current customers because you are likely required to honor those commitments in full before negotiating new terms.
4. Discuss the Status of Key Employees
Most companies have one or more key employees that are crucial to the success of the company. Some key employees could be difficult to replace, depending on the type of manufacturing industry. Make sure that your business development plan includes strategies for retaining key employees. The buy-sell agreement should also include provisions regarding existing employee benefits and how those benefits will be handled (i.e. seller pays out existing employee benefits).
5. Does the Company Have Marketable or Unique Products?
Having a marketable product is the key to success in the manufacturing industry. Make sure that the company is producing quality products that elicit excellent customer reviews and repeat business. Check customer reviews to determine the company's reputation in the manufacturing sector. If you are buying a manufacturing business that produces products for a niche market, carefully evaluate if the customer base is expected to grow or at least remain stable to ensure continued business.
6. Are the Supply Agreements Transferable?
Creating products requires materials. Do not forget to carefully review all supply agreements to ensure those agreements have a transferability clause. Maintaining a reliable stream of supplies is essential. Any increase in supply costs or delays in receiving supplies because you must negotiate new agreements could result in much lower profits.
7. Go Over All the Existing Lease Agreements
A manufacturing company may have a variety of lease agreements. Lease agreements may cover equipment, machinery, buildings, and real estate. Before buying a manufacturing business, review all lease agreements to ensure that the terms are favorable and the leases are transferable to a new owner.
Careful Consideration of a Business Model is Essential When Buying a Manufacturing Business
When searching for a manufacturing company to purchase, you should be looking for a strong business model. A business model includes the organizational structure, standard business operations, sustaining and building a customer base, revenue sources, producing marketable products, and financing options.
A successful business model can be organized into three parts:
- What will you need to produce a quality product?
- What will you need to sell your product?
- How will customers pay for the product?
Any manufacturing company that you intend to purchase should fit within your desired business model. At its core, a business model is a plan for making money. If a manufacturing company does not fit within your business model, you may want to question whether it might be better to pursue other options for buying a manufacturing business.