My family is considering a sale of our manufacturing business. How realistic is a successful sale?

T

teee

New member
Some background:

My family has owned and operated a small contract manufacturing business for 40 years now. I came on in 2019 to continue and eventually take control of the business.

I've wrestled at length with this, and have decided that I need to leave the company meaning we have to look at a sale. I told my aunt, the owner, that I would stay on up to 12 months to assist with preparation for a sale.

A big part of the reason I decided to exit was her lack of business planning & decision making, which naturally also makes selling the business difficult.

If I owned this business, I would cut 3-4 employees immediately. My aunt has told me recently that she still runs the business not to make money, but to take care of our employees... She refuses to let anyone go and continues to hand out raises.

I would consider purchasing myself but don't want to deal with the family drama or stress involved in laying off long term employees. I know I could make this company profitable quickly, but after 4 years of effort I don't see my aunt ever actually letting go of any of our processes, much less the company itself.

Today we are meeting with the company's CPA to discuss our options. I am pushing to have the business valued by a third party, and for my aunt to seek out a broker or some kind of advisor with experience selling a business. I believe she has very unrealistic expectations for how this will go and need a professional to share this opinion with her so that it might register.

The financials:

If anyone is willing, I would greatly appreciate a rough idea of what we can expect to happen and what the business might be valued at. Here is some of our financial history. Peak sales was in 2016 with $3.0M in revenue and $1.0 M net profit due to some large contracts we received.


Year
Revenue
Gross Profit/Loss
Net Profit/Loss

2018
$1.7 M
$1 M
-$120 K

2019
$1.6 M
$844 K
-$200 K

2020
$1.2 M
$650 K
-$298 K

2021
$1.7 M
$1 M
+$29 K

2022
$1.7 M
$860 K
-$142 K

Other assets:
  • Manufacturing Equipment: $500 K
  • Raw Material: $100 K
  • Manufactured Goods (with orders in the next 12 months): $550 K
  • Manufactured Goods (No orders, realistically we will sell ~20% of this): $1 M
Employees:

We have 14 employees. 8 are dedicated to production, 6 are salary office employees. I'm confident that we only need 3 employees on the office side, with outsourced accounting/HR.
 
@teee She wants to keep the employees, but what happens to them when it's sold? Would you or your aunt be staying on for a period of time after the sale as well? How creative is she willing to get with the sale?

I think that there's a chance at a (successful?) sale, it's just not going to be as cut and dry as she may think, because of how the numbers look.

What's the options if she doesn't get any offers that she likes? Do y'all keep running it or does it shut down and y'all get not much of anything?
 
@simonsayz A good number would be let go in any scenario. I'm stuck between a rock and a hard place, I know there are some major flaws in her thinking but have to advocate for her in conversations at the same time. I can't just steam roll with her being the owner.

She wants me to stay on. I am not willing to for more than 6 months under new ownership.

She can get creative, but won't like it. Realistically, I see her insisting on an impossible sale until I decide to just walk. I'm really hoping we get an offer from a competitor in our industry.

I could consider purchasing myself at a "family discount" and paying back with profits over the coming years. I'm still trying to imagine what this would look like.

I'm just not thrilled with the idea of laying off employees with 20+ years experience and/or multiple family members. I'll either be seen as the guy who didn't want to put in the effort, or the guy who fired loyal employees.
 
@teee To put it simply, without writing a novel, If I bought the business, I'd want someone with your insight to help make decisions in improving profit, set you up as an operator with vested interest, and then in regards to the employees that would be cut. I'd see if something could be done, such as moving them to part time or a severance package plus everything I could to set the up for success in finding new jobs, such as paying to have someone update their LinkedIn, recommendations, resumes, etc and having a coach help them with applying, because too often loyal folks are fired and left to fend for themselves (whether by existing or new employers).

For getting creative with the sale, it might very much look like something that would include profit sharing for X number of years to sweeten the deal on both sides if no one ponies up much cash up front. The nice thing about sales is that there isn't just one way to do it even though everyone wants to buy dirt cheap and sell it for it's weight in gold.

But that's just me and everyone has a different idea.
 
@simonsayz Thank you for this, it does help me think about other options than a complete handover of the business.

The taking care of employees we do let go of is great and would help soften the blow to them and my aunt.

I really like the idea of profit sharing as part of the transaction. Could be used as a carrot to keep me on board for a little while and/or a way to sell the business at a lower dollar value.
 
@teee If what I said looks good to y'all, let me know. I'm looking at acquiring my first business without having to step away from my current job as well to run it, so I'm pretty open to ideas that make sense for everyone involved. I'm only on this account every few days, so send me a message if there's interest, we'll exchange numbers, play some MtG, winner takes all, and go from there.
 
@teee Same here. There's so many moving parts in selling/buying a business I see why each deal undergoes large changes from start to finish. I'll send you a message.
 
@teee Didn’t you post about this a number of weeks back? The story sounds familiar and I think back then you were still trying to convince your aunt to get an independent appraisal.

Do you have an ownership stake today, and if so, what percentage? If you don’t own any of the business today then the question is whether you want to, or whether you should just walk away since you have nothing to personally gain by sticking around. I couldn’t work for/with/under a family member that treats the business like a charity and not a business. If she won’t make business decisions for the business, I’d walk away.

If you want the business and can come up with a strategy to acquire it, can you actually get rid of her or is your aunt still going to try and pull strings. If the former and she’ll truly walk away with a payment plan over a few years then you need to walk in and look at this like you don’t know or have relationships with anyone there. You have to treat it like a business and cut roles that aren’t needed. Layoffs suck for everyone and are just as miserable for the people delivering the message as the people receiving them but you have to take emotion out of it. If your aunt has been handing out raises like prizes just because she likes people, instead of using profits to grow the business then she’s probably made some bad decisions that you’re going to have to unwind. If you don’t have the stomach for that, then walk away.

If she’s going to keep trying to control it from behind the scenes even after you take over, you’re in a no-win situation and should just walk away.

If your decision is to walk away then just walk away and make the sale of this business or the shuddering of it her problem. If you don’t have an ownership stake it’s not your problem, unless you have a documented and signed agreement where you’re getting a handsome bonus for helping her through this, and even then it’d need to be a lucrative offer, tied to a percentage of the sale price to keep me around for this.
 
@alpacaone Yes, I've posted about the situation a few times now. She has had a few conversations with others who sold their businesses which is a decent start. Next I plan to introduce her to a business sales advisor I was referred to and see if there is a fit.

I have no ownership. I know I could make it profitable, but like you said I don't have the stomach for it. I'd rather go off and start a new company or start a consulting business.

To your last point, I agree it's not my problem outside of feeling like I owe this to my family. I know I don't owe them anything, just how I feel about it. We spoke when I delivered the news of my departure, she is drafting a contract that will pay out a bonus at the end of 12 months.

So now I'm trying to put in what I can to add value to the business and carry out what will be my side of the contract, all while balancing with life to avoid creating too much stress.
 
@teee I have some experience here.

I am an outsource contract manufacturer and work with companies like yours to reduce cost so that you can be more profitable.

But I'm not sure what I am missing. Are you interchanging gross for net? Looking at the table, you aren't profitable. The multiplier would be on a negative number. Unless I miss read something.

Assuming I got that right, then your value is in the assets. The machines, capacity and/ or customers. Or in the new owners belief that they could turn it around.

A client of mine buys companies like yours, solely for the capacity.

If it were me, I would slowly start outsourcing the work. Depending on the process you specialize in, it could be/ is likely more profitable. But is way more scalable. Which means you will still need employees. Possibly more.
 
@teee Of course your struggle will be selling a loss making business. I suspect that there are items that can and should be added back in to these numbers to get to a starting point for a valuation (think cell phones, cars, over-market rent, higher than market wages, and unnecessary employees. )

These items need to be added back in to the loss to (hopefully) get it to a profit.

I have bought and sold many businesses and am happy to brainstorm with you at no cost. DM me if interested and a conversation.
 
@teee Does the business own the building? If so add it to the sales number. Assuming the equipment prices and inventory are accurate (fair market value) You would get $600K for the assets, and a 2x5 multiplier of yearly revenue. Valuations have been down for businesses across the board for the last few years. There are likely accurate valuations by specific company type. The new owner will likely come in and clean house. There is also a high likelihood, that a company may come in and run it for a year or two, then merge it with their operation, and shut the place down. The only long term way to protect the business as it is, is to let someone who has a vested interest take over. Rock and a hard place indeed.
 
@ivnmetal My aunt owns the building under another company technically, but that could definitely be included in the sale of the business.

I agree whoever purchases will eventually clean house, maybe keeping on a couple of key employees.
 
@teee Be sure that your CPA is on the same page as you with regard to goals long and short term- if you have the ability to show your aunt that the business will not support the staff long term no matter what, it might soften her position a bit. She could also stop taking any type of salary if she currently is, and that money could go towards a sales person to get back to those 2016 numbers. Be clear with your employees that the current circumstances are unsustainable- anybody who buys this is going to immediately cut people, no matter what you do. Spell it out plainly that the only way to move forward is with a leaner business model or more business coming in. I feel for you my guy, that's an unfortunate position. I would respectfully disagree that you need to advocate for your aunt to sustain an unsustainable business however- if you want to protect her she needs to come to a realistic conclusion about the company
 
@teee The gross margin is very good for this type of biz. There is no reason (other than blatant negligence) that it shouldn't be netting 15-20%. Sorry you have to go thru this and someone is about to get a deal. You can sell this for sure I can't imagine for what it should be worth, but the assets plus customer list on hand is probably it--talk to a broker about this.

You're gut is right and laying off staff or raising prices (is this possible?) is the only way. How much are the total salaries/labor per year?
 
@teee Is the net profit/loss on a recast basis?

The value of the business is the value of the equipment.

The business isn't currently profitable and it would be a major uphill battle to sell it in its current state.

The best thing that you/ your aunt can do is make the business profitable to save the rest of the employee's jobs. 6 office employees is INSANE for this size of a business.

If you were to sell the business, those people would likely lose their job anyway.

There are really 3 options:

1) grow the business so the overhead is covered and it is profitable (maybe convert an office person or 2 into a salesperson)

2) walk away

3) go down with the ship

Does your aunt have the money to continue financing the lack of profit in the business?

Don't pay more than $5k for a business valuation. Interview multiple brokers and get multiple opinions of value. Don't rely on your CPA for a business valuation. They often have zero clue what they are talking about.

If you would like to set up a more in-depth conversation, let me know. I do exit planning and brokerage for small businesses.
 
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