Increasing the Value of an Electrical Manufacturing Firm in 4 Steps
These 4 tips can help build the value of your business and lock in the best price possible at closing.
You may have heard that American manufacturing is dead but this could not be further from the truth. According to these statistics, American manufacturing output has doubled over the past three decades and shows no signs of slowing down. Manufacturing truly is the backbone of our economy and is responsible for over 17 million jobs and $1.9 trillion in financial output. Our manufacturing industry is the 2nd largest economy in the entire world and if it was counted as its own individual country, it would rank 10th largest by GDP. Almost everything we use on a daily basis originated in a manufacturing plant, whether it be the food we eat, the cars we drive or the makeup we wear. While this may create a vision of an enormous plant working overtime to assemble thousands of products, the truth is that 94% of manufacturing companies have fewer than 100 employees, classifying them as small businesses.
As we progress deeper into an age of rapidly advancing technology, our everyday lives depend more and more on electronics. Our growing dependence on electrical items has given way to booming sector within American manufacturing – electrical product manufacturing. This industry is estimated to be home to around 6,000 businesses that together, generate revenues of over $125 billion dollars annually and see profits in the 5% range. If you own an electrical product manufacturing firm and have been thinking about planning for the next step, the time could not be better. An expanding industry, consistent financials and a steady market all make for the best time to sell a business. The first step to selling your business is getting a valuation. While only a professional business broker can tell you the true value of your electrical manufacturing business, these numbers can serve as a guide so that you understand the critical factors in determining the worth of your company.
- 3-5x EBITDA
Now that you have an idea of how valuations for your industry are calculated, you can start mapping out ways to increase the value of your own electrical manufacturing firm. After selling dozens of manufacturing firms, our intermediaries have compiled this list of 4 tips to help boost the value of your electrical manufacturing company.
Every year, manufacturers lose millions of dollars due to workplace accidents. By making just a few changes in the ergonomics of your plant, you could potentially save thousands and avoid rehabilitation costs, damaged equipment, medical bills and lost time. Working in a factory is incredibly straining on the human body and manufacturing employees are most commonly diagnosed with musculoskeletal disorders due to standing or moving in awkward positions for hours at a time. While there is not much you can change about the job itself, you can take steps to change certain aspects of the environment. Small changes such as safety goggles or floor mats can reduce the stress of factory work and ultimately, decrease work-related injuries, expenses and build a reputation for safety. A complete overhaul is time-consuming, but just meeting with employees to discuss the discomforts of their job is a great starting point. Implementing an official safety program could potentially save your business thousands of dollars and shows buyers that you are low-risk and not hiding any unresolved issues.
One of the biggest red flags to buyers looking to invest in an electrical manufacturing firm is high customer concentrations. Business owners should begin analyzing their customer concentrations on a semi-annual basis around 3 years prior to when they are ready to sell, and if you see that any one customer is responsible for more than 30% of your revenues or employee output, it’s time to make some changes. Buyers worry that after the sale is complete, a big client may leave due to a change in ownership and if that client is responsible for a large portion of the business’s revenue, the results would be catastrophic. Reducing high customer concentrations can be a difficult task, but it is achievable. If you need assistance in identifying, addressing and preventing customer concentration issues, we have laid out a full game plan designed to help business owners who are thinking of selling. By taking the time to reduce high concentrations, buyers would view your business as stable and low-risk, and thus, be more likely to invest.
Transferrable Client Relations
Another critical thing to keep in mind while preparing your business for sale is client relationships – are they with you or managers/salespeople in your organization? If they are with you, you will need to transfer them to a tenured employee so that when the new owner takes over, there is no shift in the client relationship. It may be difficult to find a buyer willing to purchase your business when all of the client relationships are channeled through you. To buyers, this creates the fear that once they take over, the client relationships will be threatened due to a change in ownership. The best way to fix this is to identify a tenured, reliable employee and begin shifting some of the relationships to them, with you there to guide them and the client through the transition. We recommend starting this process months before actually moving forward with a buyer, that way, everything will be worked out by the time the business is ready to be listed. By transferring these relationships early on, the transaction will run much smoother and feel more secure to the buyer.
Customer contracts truly are the bread and butter of any service or manufacturing business and a great way to build your cash flow and appeal to buyers. While the benefits of long-term customer contracts are obvious, most business owners do not realize just how helpful they are when searching for the right buyer.
Buyers become concerned when customer relationships are with the owner, not the business, and long-term contracts can quell these fears by guaranteeing future service and ample opportunity for the new owner to win over the clients. The thing about long-term contracts is that they are great but difficult to lock down. A year is a long-time to commit to a vendor and potential customers often have a hard time signing on for so long if they don’t know the firm. Sometimes it helps to start with a 6-month contract then pitch an annual contract when it expires. Service contracts can put buyers at ease when it comes to the future of your business and also balance your cash flow, which plays a huge role in the valuation.
If you have been thinking about succession planning and an exit strategy for your electrical product manufacturing firm, we hope these 4 tips have given you some insight on how to increase its value. The manufacturing industry is booming right now, and buyers are looking in the Southeast for acquisition opportunities. If you are thinking about selling your business, the first step is finding out how much it is worth and we can tell you with a no-cost, no-obligation valuation. Even if you are 6 months to a year away from selling, taking these steps now can help you increase the sales price for when the time is right for you.