4 Steps to Selling Your Auto Parts Manufacturing Firm
Manufacturing businesses are in high demand right now – giving you an advantage.
The automotive services sector has become one of the largest and most lucrative industries in the American market today and is only expected to continue growing through the next decade. Automotive services encompass a variety of subsectors, including everything from car manufacturing to windshield repair to lube and oil shops. All of these play a critical role in our economy, as car-related businesses feed millions into our bottom line and global GDP. If you own an automotive business, the steady growth coupled with upcoming industry forecasts make it a perfect time for you to consider selling your business. While it may feel counterintuitive, the best time to plan your exit is when everything is going great: your business, the economy and your industry. But before you call a business broker to beginning planning for the next step, we wanted to provide you with a few tips on how you can boost the value of your business prior to selling so that when the time comes, you are able to secure the best price possible for your life’s work.
One of the biggest subsectors of the automotive industry is parts manufacturing. The auto parts manufacturing sector consists of about 4,300 companies and produces a combined annual revenue of around $250 billion. Around 50 companies hold more than half of the industry’s revenue, but due to an increase in our nation’s auto production and performance parts demand, there is plenty to go around. The industry is looking at 2% growth rate, which isn’t huge but is still expected to be beneficial to middle market firms looking to grow. Generally, these firms can exceed their goals by focusing on providing highly technical parts or niche products whereas the large firms take more of a “jack of all trades” approach. The market is stable and as the auto industry grows, businesses in the parts manufacturing sector are flourishing as well, making it a great time to consider selling. The first step to planning for your future is finding out what your business is worth with a professional business valuation. While only a business intermediary can tell you the true value of your business, this formula will give you an idea of which factors are the most important when determining a purchase price.
- 3-5x EBITDA
- 2-4x Cash flow
Professional intermediaries will use multiples like these to place a salable value on your business, so don’t you want to do everything you can to pull a 5 instead of a 3? We meet with dozens of business owners who are ready to sell their business but find out that the value isn’t what they were hoping for. To prevent this from happening to you, we recommend taking these steps 6-12 months before seriously trying to sell.
Sustainability seems to be a growth driver is almost every industry, especially auto-related sectors. Concern over climate change and energy have motivated consumers to make greener choices in their auto-related purchases. Demand for hybrid cars and greener fuel has grown exponentially over the past few years and in the future, consumers will also prefer renewable and non-hazardous materials in their cars. To cope with the demand, many parts suppliers are implementing green initiatives in their plants. Sourcing environmentally-friendly materials, reusing supplies when possible, and properly disposing of all hazardous waste are just a couple of ways for an auto parts supplier to reduce their footprint prior to selling. Buyers will be impressed by a business that focuses on consumer trends and green initiatives also tell investors that your business is low-risk for any environmental sanctions.
Properly managing your inventory is critical to a successful supply chain. Studies have shown that employees waste a ton of time looking for parts and managing interruptions to the supply chain. If you think this is a problem within your business, it’s time to implement an official parts management system. Technology is the core of an efficient supply chain process and while technology can be incredibly expensive, it’s an investment that will boost your numbers and benefit you later as good will. Implementing an actual system to manage parts will cut wasted time, lost material and save you money in the long run. A good inventory management system can also provide you with some helpful information regarding production and sales and give insight into other areas that could use some improvement. No buyer wants to purchase a manufacturing business that isn’t properly managing its supply, so take the time now to get a proper system up and running so buyers will recognize that your business is worth investing in.
High customer concentrations can be a serious deal killer. A business could have growing sales, steady financials and a fantastic product, but if the customer concentrations are out of whack, no buyer or lender will touch it. Customer concentration issues arise when any one customer accounts for more than 30% of your revenues. Buyers often view high customer concentrations as risky because relationships on big accounts such as these are generally channeled through the owner. When the owner transitions out of the business, the buyer fears that the client will end up leaving. In the parts manufacturing industry, a good way to reduce your client concentrations is to work to increase the amount of business you are doing with smaller clients. This will balance out the revenues that are tied to your larger clients because now the smaller ones are increasing the money they spend with you. For more information, we have created a full game plan for businesses who discover they have a concentration problem, which highlights how to identify, resolve and prevent customer concentration problems.
As mentioned before, cash flow is critical when determining the value of an auto parts manufacturer. To start preparing your business for sale, you’ll want to ensure your cash flow has been on an incline for the three previous years and usually, to make that happen, you need to find ways to boost sales and cut expenses. One major way that manufacturers can achieve this to renegotiate supplier contracts. Oftentimes, manufacturers stick with the same supplier due to ease and don’t ever really see what else is out there, but putting out an official RFP when your annual contracts are up, you may find that you can get better pricing elsewhere. Your current supplier may even cut you a deal to keep the business. While it can be tedious, shopping around and negotiating supplier contracts could save you thousands on materials and ultimately, boost your cash flow and earn you a higher multiple.
For an owner of an auto parts manufacturer, it is a great time to sell your business. There are buyers actively looking in the automotive industry for a successful company that has shown consistent growth and if that sounds like you, you should begin taking these steps to further increase the value of your business. Someday you will decide to explore your options for a sale and hopefully, these 4 tips can help you prepare. Viking Mergers & Acquisitions can help you to understand where you stand today and how far you need to go. We offer a no-cost, no-obligation valuation for business owners. Valuations are a priceless tool that all business owners should equip themselves with and we are here to help when you are ready.